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File pnmc5021 (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ************************************************************************* FCC 96-278 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) Amendment of Parts 20 and 24 of the ) Commission's Rules -- Broadband ) WT Docket No. 96-59 PCS Competitive Bidding and the ) Commercial Mobile Radio Service ) Spectrum Cap ) ) Amendment of the Commission's ) Cellular/PCS Cross-Ownership Rule ) GN Docket No. 90-314 ) REPORT AND ORDER Adopted: June 21, 1996 Released: June 24, 1996 By the Commission: TABLE OF CONTENTS Paragraph I. Introduction and Executive Summary 1 II. Rules Affecting Designated Entities 7 A. Meeting the Adarand Standard 7 1. Control Group Equity Structures 19 2. Affiliation Rules 28 3. Installment Payments 37 4. Bidding Credits 49 5. Information Collection 56 B. Definitions 57 1. Small Business 57 2. Rural Telephone Company 62 C. Extending Small Business Provisions to the D and E Blocks 68 D. Adjusting Payment Provisions for 10 MHz Licenses 73 E. Rules Regarding the Holding of Licenses 80 III. The Cincinnati Bell Remand 86 A. The Cellular/PCS Cross-ownership Rule 86 B. The 20 Percent Attribution Standard 108 IV. Ownership Disclosure Provisions 133 V. Auction Schedule 142 VI. Other Issues 149 A. Limit on Licenses Acquired at Auction 149 B. Partitioning and Disaggregation 151 C. Bid Withdrawal 152 VII. Conclusion 155 VIII. Procedural Matters and Ordering Clauses 156 APPENDIX A: Hypothetical Herfindahl-Hirschman Indices APPENDIX B: Final Rules APPENDIX C: Final Regulatory Flexibility Analysis APPENDIX D: List of Parties Filing Comments and Reply Comments I. Introduction and Executive Summary 1. In this Report and Order, we modify our competitive bidding and ownership rules for the Personal Communications Services in the 2 GHz band ("broadband PCS"). Many of our rule modifications concern the treatment of designated entities, i.e., small businesses, rural telephone companies, and businesses owned by members of minority groups and women, under our rules for the F block. We also amend other broadband PCS rules in order to encourage sincere bidding, streamline the auction process, and lessen administrative burdens. In addition, in response to the remand from the U.S. Court of Appeals for the Sixth Circuit in Cincinnati Bell Telephone Co. v. FCC, we modify our rules governing cellular licensees' ownership of broadband PCS licenses in all frequency blocks. 2. As we explained in the Notice of Proposed Rule Making, we were prompted by the Supreme Court's decision in Adarand Constructors, Inc. v. Pe¤a to reexamine our race- and gender-based F block rules. We adopted these rules in the Competitive Bidding Fifth Report and Order in order to fulfill our mandate under Section 309(j) of the Communications Act of 1934, as amended ("Communications Act"), to provide opportunities for businesses owned by members of minority groups and women to participate in the provision of spectrum-based services. After we adopted these rules, however, the Supreme Court held in Adarand that any federal program that makes distinctions on the basis of race must satisfy the strict scrutiny standard of judicial review. 3. Having examined the comments submitted in response to the Notice, we conclude that the present record is insufficient to support our race-based F block rules under the strict scrutiny standard, or to support our gender-based rules under the intermediate scrutiny standard that currently applies to those rules. We have considered the need to award the remaining broadband PCS licenses expeditiously and to promote the rapid deployment of new services to the public without judicial delays, as well as the statutory objective of disseminating licenses among a wide variety of applicants, including designated entities. Bearing these factors in mind, we conclude that, to avoid uncertainty and the delay that would likely result from legal challenges to the special provisions for minority- and women-owned businesses in our broadband PCS rules, it is appropriate to make our F block rules race- and gender-neutral. We believe that our action here is consistent with our obligations under Section 309(j). 4. As we explained in the Notice, our experience conducting the A, B, and C block broadband PCS auctions also led us to examine other aspects of our rules, and we have determined that we should take certain steps to streamline our procedures and minimize the possibility of insincere bidding and bidder default. To achieve these goals, to make our F block rules race- and gender-neutral, and in response to the Cincinnati Bell decision, we make the following changes: þ We amend Section 24.709 and eliminate Section 24.715 of the Commission's Rules to make the 50.1 percent "control group" equity structure, which previously was available only to women- and minority-owned businesses for purposes of F block eligibility, available to all small businesses and entrepreneurs. þ We amend Section 24.720 of the Commission's Rules to eliminate the exception to our F block affiliation rules that excludes the gross revenues and assets of certain affiliates controlled by investors who are members of the applicant s control group. þ We amend Section 24.716 of the Commission's Rules to eliminate two of the installment payment plans available to F block applicants and extend the most favorable plan to all small businesses. We also shorten the interest-only payment period of this plan from six to two years. þ We amend Section 24.717 of the Commission's Rules to eliminate bidding credits based on minority- and women-owned status. Instead, we provide for a two-tiered small business bidding credit. þ We amend our definition of "rural telephone company" in Section 24.720 of the Commission's Rules to make it conform to the definition in the Telecommunications Act of 1996 ("1996 Act"). þ We amend Sections 24.706 and 24.716 of the Commission's Rules to raise upfront payments for the D, E, and F blocks to $0.06 per MHz-pop and the down payment for the F block to 20 percent. þ We amend Section 24.839(d) of the Commission's Rules to relax the restriction on designated entities' ability to transfer broadband PCS licenses. þ We eliminate Section 24.204 and amend Section 24.229 of the Commission's Rules to abolish our cellular/PCS cross-ownership rule and our PCS spectrum cap and rely on the 45 MHz cap on Commercial Mobile Radio Services ("CMRS") spectrum in Section 20.6. þ We amend Section 20.6 of the Commission's Rules to eliminate the 40 percent attribution threshold's application to ownership interests held by minority- and women- owned companies for purposes of the CMRS spectrum cap; expand the post-auction divestiture provisions to come into conformity with those previously applied in our cellular/PCS cross-ownership rule; and allow an affirmative showing that an otherwise attributable ownership interest should not be attributed to its holder. þ We amend Section 24.813 of the Commission's Rules to reduce ownership information disclosure requirements. 5. To expedite the delivery of broadband PCS services to the public, we plan to offer the D, E, and F block licenses together in one simultaneous multiple round auction. Recognizing that there are operational concerns with auctioning all 1,479 licenses in the same auction, however, we also delegate authority to the Wireless Telecommunications Bureau to conduct two concurrent auctions if circumstances warrant. In general, we favor a single auction because of the efficiency it will provide to bidders and the Commission and the speed with which it will deliver the 10 MHz broadband PCS licenses into the hands of parties that can begin providing service to the public. 6. Finally, we address a number of other issues that were raised by commenters. We decline to modify our limitation on the total number of licenses that may be won by bidders in the C and F block auctions. In response to concerns about the impact of our rules regarding bids that are made erroneously, we amend Section 24.704 of our rules to modify our bid withdrawal payment requirements. II. Rules Affecting Designated Entities A. Meeting the Adarand Standard 7. Background. In the Notice, we explained the history of our race- and gender-based F block rules, the statutory objectives they were designed to promote, and the impact of the Supreme Court's decision in Adarand v. Pe¤a. As we discussed, an intermediate scrutiny standard of review was applied to federal race- and gender-based programs at the time our F block rules were adopted. In Adarand, however, the Supreme Court held that all racial classifications, whether imposed at the federal, state or local government level, must be analyzed by a reviewing court under strict scrutiny, which requires such classifications to be narrowly tailored to further a compelling governmental interest. An intermediate scrutiny standard of review (under which a provision is constitutional if it serves an important governmental objective and is substantially related to achievement of that objective) continues to apply to gender-based measures. We note, however, that the Supreme Court has not addressed constitutional challenges to federal gender-based programs since Adarand. 8. In the Notice, we observed that judicial precedent indicates that only a record of discrimination against a particular racial group would support remedial measures designed to benefit that group and that generalized assertions of discrimination are inadequate. We explained that, although we have some general evidence of discrimination against certain racial groups, none of the evidence we have appears adequate to satisfy strict scrutiny. We requested comment on a number of questions related to this analysis, including whether compensating for discrimination in lending practices and in practices in the communications industry constitutes a compelling governmental interest. We also asked interested parties to comment on non-remedial objectives that might be considered compelling governmental interests, such as increased diversity in ownership and employment in the communications industry or increased industry competition. We asked parties to submit statistical data, personal accounts, studies, or any other data relevant to the entry of specific racial groups into the field of telecommunications, and we asked whether our race-based provisions are narrowly tailored to serve the interests that commenters assert to be compelling governmental interests. We also tentatively concluded that the present record in support of our gender- based F block rules may be insufficient to satisfy intermediate scrutiny, and we asked commenters to submit evidence relevant to the entry of women into the field of telecommunications. 9. In the Notice, we also tentatively concluded that we should not delay the F block auction for the amount of time it would take to adduce sufficient evidence to support our race- and gender-based F block provisions, and that proceeding with the F block auction with these rules intact would not serve the public interest because it might result in litigation that ultimately would delay the auction of additional broadband PCS licenses and, thus, postpone the introduction of new competition to the marketplace. We tentatively concluded that, if we were unable to gather sufficient evidence to support our race- and gender-based provisions in this proceeding, we should eliminate these provisions from our rules and proceed as expeditiously as possible to auction the remaining broadband PCS licenses. 10. Comments. The majority of commenters addressing our present record in support of race-based F block provisions believe that this record is insufficient to withstand strict scrutiny. Moreover, no parties offered specific anecdotal or statistical evidence to support our race-based F block rules. CIRI, however, states that Congress and the Commission have been presented with substantial evidence of the need to promote economic opportunity for minorities, particularly in the communications industry. Encouraging the Commission to review this evidence, CIRI contends that the Commission should retain its minority preference provisions and can justify these provisions under the strict scrutiny standard mandated by Adarand. According to Ondas, the lack of Latino-owned C block license winners serves as statistical and anecdotal evidence to support the F block raced-based rules. 11. With respect to our gender-based F block provisions, the majority of commenters addressing our present record agree with our tentative conclusion that this record may be insufficient to satisfy the requirements of intermediate scrutiny. No commenters offered data to supplement our record supporting gender-based provisions. AWRT and Antigone, however, contend that the record in support of our gender-based provisions will withstand intermediate scrutiny, and they ask the Commission to retain gender-based preferences for the F block auction. These commenters argue that the gender-based provisions are substantially related to the achievement of a goal mandated by Congress and that there are no more narrowly tailored alternatives available, nor any that put less of a burden upon men and male- owned entities. 12. Most commenters support making the F block auction rules race- and gender- neutral. AirLink and Auction Strategy, for example, recommend that, as in the C block auction, the Commission extend to all small businesses the same special provisions originally provided to small minority- and women-owned companies. DCR, a minority- and women- owned business, believes that the Commission should forego the use of race- and gender- based special provisions in the F block to ensure that small businesses have a prompt and meaningful opportunity to compete for 10 MHz licenses. In this connection, DCR notes that providing incentives to all small businesses will encourage the participation of minority- and women-owned businesses. Similarly, PCIA and Gulfstream believe that the Commission can best serve its statutory duties to assist minority- and women-owned businesses by adopting generous rules for small businesses. Devon, a women-controlled company, also agrees with the proposal to eliminate race- and gender-based provisions, stating that it is critical to avoid delays in licensing. AT&T argues that we should not repeat the use of special provisions for small businesses in the F block in light of the "undesirable results" of the C block auction. Allied opposes proceeding to auction with race- and gender-neutral rules without first conducting a "Croson study." 13. Decision. Having evaluated the record before us, we revise our F block rules to make them race- and gender-neutral. Overall, the commenters agree that this approach will best serve our goal of rapidly conducting the F block auction with the least risk of judicial delay. Moreover, the arguments presented against it were, for the most part, already considered in the Competitive Bidding Sixth Report and Order, in which we concluded that the C block auction rules should be race- and gender-neutral. Significantly, this conclusion was upheld by the D.C. Circuit Court of Appeals, which held in Omnipoint v. FCC that we acted reasonably in concluding that, in light of the additional time it would take to develop a record to support the race- and gender-based provisions for the C block, we should revise these rules by providing the most favorable terms to all small businesses, i.e., "leveling benefits upward." In light of the comments and the Omnipoint decision, and because we do not have sufficient evidence to support our F block race- and gender-based provisions in this proceeding, we conclude that making our F block rules race- and gender-neutral will serve the public interest by enabling us to auction the remaining broadband PCS licenses as expeditiously as possible. 14. We recognize, as CIRI points out, that we have been presented with important evidence of the need to promote economic opportunity for minorities. Thus, in the Competitive Bidding Fifth Report and Order, when we adopted the race-based provisions for the entrepreneurs' blocks assuming an intermediate level of scrutiny, we cited studies and other evidence to support the existence of widespread discrimination against minorities in lending practices. The evidence that we cited showed the difficulty African- and Hispanic- Americans have in obtaining mortgage loans; the difficulty African-American business borrowers face in raising capital; and the shortage of capital as the principal problem faced by minorities seeking ownership opportunities in the broadcast industry. We believe such data are important. However, CIRI has not demonstrated that this information will be sufficient to provide a basis for measures benefitting specific racial groups seeking to participate in broadband PCS. 15. We also believe that at this time we cannot agree with AWRT and Antigone's proposal that we retain the gender-based F block provisions. As noted above, the Supreme Court has not addressed the level of scrutiny courts must apply to gender-based programs since Adarand. This issue is the subject of a case currently pending before the Court. Additionally we observe that the D.C. Circuit Court of Appeals stayed the C block auction under an intermediate scrutiny standard on the basis of race- and gender-based provisions identical to those adopted for the F block. Thus, we believe that retaining the gender-based provisions would create a substantial risk of delaying the F block auction due to litigation and could result in future legal challenges in the course of licensing F block winners. 16. In deciding to make our F block rules race- and gender-neutral, we are balancing competing objectives under Section 309(j), including mandates to provide opportunities for women and minorities while at the same time to promote competition and the rapid delivery of services to the public. On balance, we conclude that making our rules race- and gender- neutral is the best approach at this time, and the record reveals that many small businesses and women- or minority-owned entities agree with this assessment. Also, we believe the impact of this change in our rules may not be significant, because many minority- and women-owned entities are small businesses and will therefore qualify for the same special provisions that would have applied to them under our previous rules. Thus, we believe that our amended rules will continue to fulfill our mandate under Section 309(j) to provide opportunities for minority- and women-owned businesses to become providers of spectrum- based services. 17. Moreover, as noted above, we have initiated a separate inquiry to gather evidence regarding barriers to entry faced by minority- and women-owned firms as well as small businesses. If a sufficient record can be adduced, we will consider race- and gender-based provisions for future auctions. Toward this end, we have already gathered some information from recent auctions, including data on women- and minority-owned business participation. Minority- and women-owned firms participated in the C block auction in the absence of race- and gender-based rules, for example, and 36 percent of the winning bidders were women- and minority-owned firms. On the other hand, we note that in other auctions where no race- or gender-based preferences were available, minority- and women-owned firm participation has not been as substantial. We will continue to track such information and evaluate it with other data gathered with the goal of developing a record to support race- and gender-based provisions that will satisfy judicial scrutiny. We note that by September 1997 we are required to submit a report to Congress on this issue. Finally, we are looking for other ways to reduce barriers to entry for women- and minority-owned businesses, such as allowing partitioning and disaggregation of broadband PCS licenses, an adjustment to our rules that may be helpful to small businesses generally. 18. Our decision to make the F block auction rules race- and gender-neutral leads us to modify specific F block provisions. As explained below, these provisions include the control group equity structures, the affiliation rules, installment payment plans, and bidding credits. 1. Control Group Equity Structures 19. Background. The F block auction is limited to applicants that, together with their affiliates and persons or entities that hold interests in them, have gross revenues of less than $125 million in each of the last two years and total assets of less than $500 million. In the Notice, we described the control group equity structures that applicants may use to establish eligibility to participate in the F block auction. Under the first equity structure option, the control group must hold at least 25 percent of the applicant's total equity. Of that 25 percent, at least 15 percent must be held by "qualifying investors." If these and certain other requirements are met, the remaining 75 percent of the applicant's equity may be held by other non-controlling investors, and the gross revenues and total assets of any such investor will not be attributed to the applicant provided that the investor holds no more than 25 percent of the total equity of the applicant. Under the second equity structure option, available to minority- and women-owned applicants only, the control group must own at least 50.1 percent of the applicant's total equity. Of that 50.1 percent equity, at least 30 percent must be held by qualifying investors who are members of minority groups or women. If these and certain other requirements are met, the remaining 49.9 percent of the applicant's equity may be held by non-controlling investors, and the gross revenues and total assets of any such investor will not be attributed. 20. In the Notice, we tentatively concluded that, in the absence of a sufficient record to support offering the 50.1/49.9 percent equity structure only to women- and minority-owned businesses, we should make it available to small businesses and entrepreneurs as we did in our C block competitive bidding rules. Alternatively, we stated that we could simplify or abandon both control group equity structure options for F block applicants. Finally, we asked commenters to discuss whether there was any need to make adjustments to the financial eligibility threshold for the F block auction and whether there was a concern that C block winners might be disqualified from acquiring F block licenses by virtue of the valuation of their C block licenses. 21. Comments. Most commenters support extending the 50.1/49.9 equity option to all entrepreneurs and small businesses either expressly or by simply stating that the F block rules should mirror the C block rules. Vanguard and NCMC, for example, advocate this approach because it has already passed judicial review. Many commenters cited interference with pre- existing ownership and investment relationships as their reason for opposing any other change to the control group structures. AirLink, for example, states that the control group rules are now familiar to the investment community and industry and that their certainty and specificity provide a road map for investors and entrepreneurs. 22. Other commenters oppose extending the 50.1/49.9 percent equity structure option to all small businesses and entrepreneurs because they claim that it has become a vehicle for subsidizing large companies and that it has resulted in convoluted applicant ownership structures for designated entities. Radiofone argues that our extension of the 50.1/49.9 percent equity option to all small businesses in the C block was based on the fact that many minority- and women-owned businesses had already established equity structures based on this provision, a justification that does not apply to the F block. Radiofone also asserts that because no 10 MHz licenses have been issued and large businesses will not have a "headstart" over entrepreneurs, time considerations do not compel an extension of the 50.1/49.9 percent equity structure option as they did for the C block. Radiofone further argues that removing this exception completely from the F block rules should not prejudice minority- or women-owned businesses, which will have time to utilize other financing options. 23. Conestoga, addressing directly the issue of whether we should change the financial eligibility threshold for the F block, contends that we should employ our previously established thresholds. Conestoga also asserts that C block winners should be allowed to participate in the F block auction so long as the value of their C block license does not change their financial status. Similarly, AirLink and other commenters argue that C block licenses should be counted as assets by C block auction winners in determining whether they are eligible for the F block auction. On the other hand, some commenters, such as Sprint, DCR, the Alliance, Western Wireless, NextWave, and Devon, advocate excluding C block licenses from F block applicants' assets. Other commenters suggest ways of conducting the F block auction that would amount to a change in the financial eligibility threshold. For example, the PCS Coalition, the NY Coalition, USIW, Liberty, and the NTCA advocate a 10 MHz spectrum block set-aside for small businesses and rural telephone companies. TEC and Mountain Solutions propose setting aside all three 10 MHz blocks as small business blocks, as the only approach that will allow small businesses to aggregate 30 MHz of PCS spectrum. Conversely, AT&T argues that all three 10 MHz blocks should be open to all competitors. Finally, Gulfstream proposes that all CMRS licensees be precluded from bidding on the F block to prevent spectrum warehousing and promote competition. 24. Decision. As part of our decision to make the F block rules race- and gender- neutral, we conclude that the 50.1/49.9 percent equity option should be available to all small businesses and entrepreneurs. As we stated in the Competitive Bidding Sixth Report and Order (where we made this same modification to the C block rules), we believe that applicants and the public interest will be better served if we proceed in a manner that both reduces the likelihood of legal challenges and enhances the opportunities for a wide variety of applicants, including designated entities, to obtain licenses and rapidly deploy broadband PCS. The D.C. Circuit Court of Appeals agreed with this approach when it upheld our decision to level benefits upward for C block applicants. We also adopt this rule modification because we believe that making the same equity structures available to both C and F block applicants is necessary so that C block participants will not be required to structure themselves differently in order to participate in the F block auction. When we extended the 50.1/49.9 percent equity option to all small business applicants in the C block, we did so in part because minority- and women-owned applicants had already structured themselves under this rule, and we determined that retaining it would help to preserve existing business relationships formed upon such reliance. Providing for the same control group structures for the F block will benefit C block participants that also wish to apply for the F block. Moreover, it will benefit other entities that did not participate in the C block auction because it continues equity structures that are familiar to the industry and the financial community. 25. We decline to make adjustments to the financial eligibility thresholds in our F block rules, which were previously justified in the Competitive Bidding Fifth Report and Order as promoting diversity of licensees without excluding firms that are likely to have the financial ability to provide sustained competition. We believe that retaining the same thresholds as those used for the C block will allow for participation by entities which used our C block rules as guidelines for determining their structure in preparation for the F block auction. Moreover, these thresholds were used by C block bidders, many of whom will be interested in participating in the F block auction. We decline to further restrict participation in the F block (or any of the other 10 MHz blocks) to small businesses and rural telephone companies. We believe that setting aside the F block for both entrepreneurs and small businesses will be sufficient to achieve our objectives of providing opportunities for small businesses to obtain 10 MHz licenses and ensuring broad dissemination of 10 MHz licenses. 26. In addition, we decline to treat C block licenses as assets that could potentially preclude C block winners from F block eligibility, as some commenters advocate. We believe it would be unfair to disqualify C block winners on the basis of their success in acquiring capital to participate in that auction, primarily because we have indicated previously that the C and F blocks are linked. Specifically, we have stated that the C and F blocks occupy contiguous spectrum that offers the opportunity for entrepreneurs to efficiently aggregate spectrum. Also, when we imposed a limitation on the total number of licenses that may be awarded to a single entity in the entrepreneurs' blocks, we provided that "no single entity may win more than 10 percent of the licenses available in the entrepreneurs' blocks, or 98 licenses. These licenses may all be in frequency block C or all in frequency block F, or in some combination of the two blocks." We believe that treating C block winners' licenses as an asset for purposes of eligibility for the F block auction could frustrate business plans and auction strategies made in reliance on our previous statements. We note also that it is uncertain whether the C block licenses will be issued before the F block auction begins. 27. For the reasons stated above, we will not consider C block licenses as assets for purposes of F block eligibility, but we do believe that other types of licenses should be considered as assets. Applicants should be aware that other licenses (such as Specialized Mobile Radio ("SMR"), narrowband PCS, broadband PCS A and B blocks, and cellular) should be included in their total asset calculations for the F block. 2. Affiliation Rules 28. Background. In the Notice, we discussed the exceptions to our affiliation rules applicable to the F block. These rules identify all individuals and entities whose gross revenues and assets must be aggregated with those of the applicant to determine whether the applicant exceeds the financial caps for the entrepreneurs blocks or for small business size status. There are two exceptions to these rules. Under the first exception, Indian tribes and Alaska Regional or Village Corporations organized pursuant to the Alaska Native Claims Settlement Act, 43 U.S.C.  1601 et seq., are not considered affiliates of an applicant owned and controlled by such tribes and corporations. Under the second exception, the gross revenues and assets of affiliates controlled by minority investors who are members of the applicant s control group are not attributed to the applicant. 29. In the Notice, we requested comment on whether, if we determined that the record was insufficient to support an exception to our affiliation rules based on race, we should amend our affiliation rule for the F block to eliminate the exception pertaining to minority investors, or whether we should modify the exception as we did for the C block. This modified rule, 47 C.F.R.  24.720(l)(11)(ii), allows all small business applicants to exclude any affiliates who would otherwise qualify as entrepreneurs by having gross revenues of less than $125 million and total assets of less than $500 million and whose total assets and gross revenues, when considered on a cumulative basis and aggregated with each other, do not exceed these amounts. This rule was affirmed by the D.C. Circuit Court of Appeals. 30. We did not propose to eliminate the affiliation exception for Indian tribes and Alaska Regional or Village Corporations. We tentatively concluded that the "Indian Commerce Clause" of the United States Constitution provides an independent basis for this exception that is not implicated by the holding in Adarand. 31. Comments. Point urges us not to adopt the modified minority investors exception that we adopted for the C block, stating that this exception merely gave opportunities to large companies. Similarly, DCR asserts that the exception is inconsistent with the goals of special provisions for small businesses because it permits control group members to be affiliated with large businesses, raising questions of control. DCR contends that while C block licensees that relied on the exception should not be excluded from the F block, the exception should not be extended to new applicants. 32. Sprint, on the other hand, asserts that all small business applicants should be allowed to exclude from attribution the assets of affiliates that would themselves qualify as entrepreneurs. PCSD, Vanguard, NatTel, Conestoga, NCMC, RTC, PCIA, and WPCS also support adoption of the same change that we made for the C block. Antigone asserts that the Commission should extend the C block affiliation rules to the D, E, and F blocks and that it should limit its inquiry with respect to entities not under common control to whether together they own cognizable interests in CMRS. According to TEC, the FCC should not allow any investment in bidders by individuals or entities that do not individually and in the aggregate qualify as small businesses. 33. CIRI and WPCS support our tentative conclusion that the "Indian Commerce Clause" of the United States Constitution provides an independent basis for the affiliation exception for Indian tribes and Alaska Regional or Village Corporations that is not affected by the Supreme Court's holding in Adarand. PCIA also supports retention of this exception. 34. Decision. We will eliminate the exception to our affiliation rules pertaining to minority investors for purposes of the F block auction. We believe that to retain this exception in its present state poses legal risks that, as discussed above, could delay the award of F block licenses. Furthermore, we decline to adopt the modification that we utilized for the C block, which enabled small business applicants to be affiliated with larger entrepreneur- size entities without jeopardizing their eligibility. 35. We adopted the modified exception for the C block in order to allow small businesses to pool their resources in a capital intensive service. We stated that we believed that these firms face barriers to raising capital not faced by larger firms and that small businesses experienced in managing smaller businesses should not be penalized because they own or are otherwise affiliated with other businesses whose assets and revenues must be considered on a cumulative basis and aggregated for purposes of qualifying for the C block. We observe also that the rule modification for the C block was adopted at a time when a number of minority-owned applicants had relied on the rule and had structured their business arrangements accordingly. The D.C. Circuit found our modification of this rule to accommodate these applicants to be appropriate under the circumstances. Commenters, however, have criticized this exception as contrary to our purpose of offering opportunities to small businesses because it opened the door to somewhat larger entities being able to participate as small businesses in the C block auction. 36. Upon further consideration, we are not convinced that the C block exception is needed under current circumstances, and we acknowledge the argument that the exception may qualify too many larger entities as small businesses. We believe the smaller 10 MHz F block licenses, in particular, will be attractive to smaller entities. In that regard, we believe that declining to adopt the C block exception for the F block advances opportunities for smaller firms that may be well suited to compete for 10 MHz broadband PCS licenses. As discussed below, we will offer "tiered" bidding credits to benefit varying sizes of small businesses planning to participate in the F block auction. For applicants that participated in the C block auction and relied on our affiliation exceptions in structuring themselves, we will consider requests to waive our rules to allow them to be eligible to participate in the F block auction. Finally, we will retain the exception to our affiliation rules for Indian tribes and Alaska Regional or Village Corporations. 3. Installment Payments 37. Background. Our existing F block rules provide for five different installment payment plans. The first plan, available to entities with gross revenues in excess of $75 million, allows them to pay interest based on the ten-year U.S. Treasury rate plus 3.5 percent, with payment of principal and interest amortized over the term of the license. The second plan, available to entities with gross revenues between $40 and $75 million, provides for interest-only payments for one year, with the principal and interest equal to the ten-year U.S. Treasury rate plus 2.5 percent amortized over the remaining nine years of the license term. The third plan, available only to entities that qualify as a small business or consortium of small businesses, provides for the payment of interest at the ten-year U.S. Treasury rate plus 2.5 percent, but allows eligible entities to make interest-only payments for two years, with principal and interest amortized over the remaining eight years of the license term. The fourth plan, available only to businesses owned by members of minority groups or women, provides for interest-only payments for three years and payments of principal and interest over the remaining seven years of the license term. The final and most favorable plan, available only to small businesses owned by members of minority groups or women, provides for interest-only payments for six years and payments of principal and interest amortized over the remaining four years of the license term. 38. We proposed in the Notice to eliminate the special provisions based on an applicant's status as a minority- or women-owned business in the event we found that the record was insufficient to sustain such provisions. We sought comment on whether we should provide for three installment payment plans based solely on financial size, as we did for the C block. We also requested comment on whether it is necessary to extend the most favorable C block payment terms to F block auction winners and, in particular, whether the six-year interest-only period serves the public interest, given that the amounts bid for the 10 MHz licenses most likely will be lower than those bid for 30 MHz licenses in the C block auction. 39. Comments. The majority of commenters support the adoption of three installment payment plans as discussed in the Notice. TDS advocates extending installment payments to rural telephone companies also. PCSD, which qualified as a minority- and woman- owned small business in the regional narrowband PCS auction and won five licenses, states that it found in that auction that, between bidding credits and installment payments, only installment payments provided a financial benefit. According to PCSD, this was the case because the prices paid for licenses with bidding credits in the regional narrowband PCS auction were equal to or higher than the prices companies paid for equivalent licenses without the credits. PCSD believes that entities acquiring F block licenses will need a reduced payment schedule, and that none of the installment payment periods should be modified. Arguing that many bidders have reasonably expected that the F block licenses would be available on terms similar to those of the C block licenses, and have made business plans based on this expectation, DCR believes that the six-year interest-only payment period used for the most favorable C block auction installment payment plan should also be employed for the most favorable F block plan. Airlink argues that a six-year deferral period is necessary for small businesses because most business plans show a six- to eight-year period before a PCS provider becomes cash flow positive. Antigone contends that the C block installment payment provisions should be extended to the D, E, and F blocks. Antigone argues, however, that the Commission should allow optional partial pre-payments in increments of $100,000. 40. PersonalConnect, a beneficiary of the installment plan rules as a C block designated entity, believes that our current installment payment rules encourage undesirable speculation and risk-taking since only 10 percent of the winning bid is paid -- as a down payment -- in the first six years under the most favorable plan. PersonalConnect suggests that shortening the period for interest-only payments to four years, in conjunction with increasing the down payment requirement to 25 percent, would dampen speculation while still providing opportunities for designated entities to win licenses. AT&T argues that the Commission should eliminate the small business provisions from the F block rules, but if such provisions are retained a simplified installment payment plan with a shorter interest-only period should be adopted. 41. Decision. Based on our review of the record, we amend our F block rules concerning installment payments as set forth in the Notice. Thus, all small businesses, including those owned by minorities and women, will be eligible for the most favorable installment plan. We conclude that extending this installment payment plan to all small businesses will give minority- and women-owned businesses an opportunity to participate in the provision of spectrum-based services. Moreover, this leveling up approach was upheld by the D.C. Circuit Court of Appeals for the C block auction. 42. We also conclude, however, that we should amend our rules to shorten the period during which F block auction winners eligible for this plan may make interest-only payments. For the reasons discussed below, the most favorable plan will have a two-year interest-only payment period, rather than a six-year interest-only period. The plan will provide for installments at a rate equal to ten-year U.S. Treasury obligations applicable on the date the license is granted, with payments of principal and interest amortized over the remaining eight years of the license term. Principal will be repaid as part of equal quarterly payments of interest and principal (as with a standard mortgage amortization schedule). 43. Entrepreneurs that are not small businesses will be eligible for installment payments as provided in Sections 24.716(b)(1) and 24.716(b)(2) of our rules. These rules provide for installments at a rate equal to ten-year U.S. Treasury obligations applicable on the date the license is granted plus 3.5 percent, with payments of principal and interest amortized over the license term for eligible licensees with gross revenues exceeding $75 million in each of the two preceding years. Eligible licensees with gross revenues not exceeding $75 million in each of the two preceding years may make installment payments at a rate equal to ten-year U.S. Treasury obligations applicable on the date the license is granted plus 2.5 percent, with interest-only payments for the first year and payments of interest and principal amortized over the remaining nine years of the license term. 44. We believe that a two-year interest-only period with an interest rate equal to the ten-year U.S. Treasury rate and principal amortized over the remaining eight years of the license term provides small businesses with the appropriate level of U.S. government assisted financing to overcome the difficulties faced in accessing capital to compete in the PCS marketplace. We agree with PersonalConnect's argument that reducing the interest-only period will dampen speculation while still providing small businesses with the ability to obtain the necessary funds for construction and initial operation of their systems. However, we believe a two-year interest-only period more effectively achieves these objectives than the four-year period suggested by PersonalConnect. 45. Specifically, the two-year interest-only period in the most favorable installment payment plan for the F block will allow small businesses two full years during which they can devote resources to business development and infrastructure costs rather than license costs. Upon completion of these two years of interest-only payments, licensees should be capable of beginning to make principal payments. We believe that an interest-only period longer than two years is not necessary to help small businesses compete in the PCS marketplace, especially with 10 MHz licenses. We initially established tiered installment payment plans that provided a two-year interest-only period for small businesses and a five- year interest-only period for small businesses owned by minorities and/or women in order to allow these entities to concentrate their resources on infrastructure build-out. We subsequently extended the interest-only period for small businesses owned by women and/or minorities to six years from the date of license grant because under the five year benchmark, principal payments would come due at the same time the designated entity was permitted to transfer the license and immediately following the first build-out requirement. By deferring payment of principal an additional year, we intended to assist the designated entity in avoiding an unwanted sale in order to avoid payment of principal. In light of Adarand, we later extended the six-year interest-only provisions to all small business C block licensees. The build-out requirements for 10 MHz licenses are more liberal than those for 30 MHz licenses, requiring only a one-fourth population coverage or showing of substantial service within the first five years, as compared to the one-third population coverage required of 30 MHz licenses. Given these less burdensome requirements, we believe that a two-year interest-only period will provide sufficient assistance to F block licensees by giving them a substantial period to devote resources to constructing their systems, while also encouraging them to provide service to the public quickly. 46. We also believe that a two-year interest-only period (and other measures adopted herein) will deter speculation and insincere bidding. If licensees need to pay only a small percentage of their winning bid (10 percent for the C block and 20 percent for the F block) through year six of the license term, they will have a greater incentive to place speculative bids because the actual cost of the license is not recognized until late in the license term. We believe that shortening the interest-only period to two years will be likely to encourage bidding, business, and financial strategies based upon market forces rather than the financial terms of installment payment plans. 47. Finally, shortening the interest-only period to two years will not foreclose opportunities for small businesses to compete in PCS. The terms that the Commission is offering (two years interest-only, interest equal to the ten-year U.S. Treasury obligation, and financing on 80 percent of the license price) are extremely attractive compared to other terms small businesses may be able to obtain. This financing will result in significant capital cost savings and financial assistance to small businesses -- our original intent in offering installment financing. Helping small businesses overcome the most significant hurdle to competition in the communications marketplace -- access to capital -- is a top priority of the Commission. We believe the steps we have taken here further this objective. We note also that a two year interest-only period is consistent with terms we have offered in other auctions, notably MDS and 900 MHz SMR. 48. We also conclude that we should amend the terms of our installment payments to provide for late payment fees. Therefore, when licensees are more than fifteen days late in their scheduled installment payments, we will charge a late payment fee equal to 5 percent of the amount of the past due payment. For example, if a $50,000 payment is due on June 1, then on June 16 $2,500 is due in addition to the payment. Without this late payment fee, licensees may not have adequate financial incentives to make installment payments on time. Licensees may therefore attempt to maximize their cash flow at the government's expense by paying late. The 5 percent payment we adopt here is an approximation of late payment fees applied in typical commercial lending transactions. Payments will be applied in the following order: late charges, interest charges, principal payments. 4. Bidding Credits 49. Background. Under our F block rules a small business is granted a 10 percent bidding credit, a business that is owned by members of minority groups or women is granted a 15 percent bidding credit, and a small business owned by members of minority groups or women is allowed to aggregate these bidding credits for a 25 percent bidding credit. We proposed in the Notice to eliminate race- and gender-based bidding credits in our F block rules if we found that the record was insufficient to withstand judicial review. We also sought comment on whether we should extend a single bidding credit to all small businesses as we did for the C block and, if so, how big that credit should be. We asked whether, as an alternative, we should offer tiered bidding credits for small businesses of different sizes. We tentatively concluded that, because the value of 10 MHz licenses may be lower than the value of 30 MHz licenses, a smaller bidding credit than we offered C block bidders may be appropriate for F block bidders. We also tentatively concluded that these lower expected values may attract smaller businesses, thus justifying a tiered bidding credit. 50. Comments. AirLink, the NY Coalition, Sprint, Conestoga, DCR, NatTel, Mid- Plains, PCS One, Western, and WPCS assert that the bidding credit used in the C block auction -- a 25 percent bidding credit for all small businesses -- should also be used in the F block auction. DCR argues that many bidders have reasonably expected that the F block licenses would be available on terms similar to those of the C block licenses and have made business plans based on this expectation. PersonalConnect claims that the 25 percent bidding credit, as opposed to installment payments, is the essential feature which will allow designated entities to attract investors. 51. NCMC, on the other hand, encourages the Commission to adopt a two-tiered bidding credit plan for small businesses participating in the F block auction, asserting that tiered bidding credits will advance Congress' goals of avoiding concentration of licenses and promoting the dissemination of licenses to a broad variety of applicants. NCMC supports a 25 percent bidding credit for small businesses that have aggregate gross revenues under $15 million and a 15 percent bidding credit for small businesses with gross revenues between $15 million and $40 million. PCIA also supports tiered bidding credits of 10, 15, and 25 percent, depending on the size of the small business. ICGC and ONE suggest a tiered definition of small business such that firms with average annual gross sales of less than $5 million would receive a 40 percent bidding credit and firms with average annual gross sales of less than $11 million would receive a 25 percent bidding credit. Mr. Harvey Leong asserts that businesses with less than $1 million in both revenues and assets should receive a 50 percent bidding credit. Finally, Advanced argues that entities located in "targeted" areas, such as high unemployment or high crime areas, should receive a 25 percent bidding credit, while entities outside these areas should receive a 10 percent bidding credit. 52. Devon urges the Commission to eliminate bidding credits and the related unjust enrichment provisions from the F block rules, asserting that the C block auction illustrates that they may discourage future participation of designated entities. Devon contends that bidders with bidding credits have generally been forced to pay a premium gross price for PCS licenses, while the net price has been roughly equivalent to the market price, thereby eviscerating any discounting impact on the license values. Devon further contends that the unjust enrichment provisions penalize designated entities by requiring the recapture of the bidding credit even when no enrichment has occurred. Devon argues that within the entrepreneurs' block the installment payment plans provide adequate assurance that small businesses will be successful in obtaining licenses. 53. Decision. Consistent with our concerns about avoiding litigation based on Adarand, we will eliminate the race- and gender-based aspects of our F block bidding credits. In place of these provisions, we adopt a two-tiered bidding credit for small businesses, as proposed by NCMC. We agree with NCMC that a two-tiered approach will promote dissemination of licenses to a broader variety of applicants than a 25 percent bidding credit for all small businesses, the approach we took for the C block. We believe that this tiered approach will encourage smaller businesses, possibly businesses that are very well suited to provide 10 MHz niche services, to participate in the F block auction. We also believe, in response to Devon's arguments, that a tiered approach enhances the discounting effect of bidding credits because not all entities receive the same benefit. We note that our original F block rules included bidding credits that were tiered -- although based on race and gender. We have also offered tiered bidding credits for small businesses in auctioning other services. In auctioning 900 MHz SMR licenses, for example, we provided a 15 percent bidding credit to very small businesses with average annual gross revenues of not more than $3 million and a 10 percent bidding credit to small businesses with average annual gross revenues of not more than $15 million. 54. We find that NCMC's specific proposal strikes a good balance between offering added incentives to very small businesses and retaining some bidding credits for entities that received them in the C block. Under the modified rule, entities with average gross revenues of not more than $15 million for the past three years are eligible for a 25 percent bidding credit. Entities with average gross revenues of not more than $40 million for the past three years are eligible for a 15 percent bidding credit. 55. We also believe that the timing of our modification here, as compared to the modifications that we made in the Competitive Bidding Sixth Report and Order, allows us to take a different approach than we took for the C block. When we modified our rules for the C block, we attempted to preserve the expectations and business strategies of applicants who had relied on their eligibility for a 25 percent bidding credit. The single 25 percent small business bidding credit adopted for the C block ensured that all prospective applicants were able to participate in the auction. Entities interested in bidding on F block licenses have not had similar expectations in structuring their businesses or formulating strategies in reliance on the tiered bidding credits originally adopted. 5. Information Collection 56. In the Notice, we asked for comment on our proposal to continue to request that applicants provide information regarding minority- and women-owned status in their short- form applications if we eliminated the race- and gender-based provisions in our F block rules. All the comments that we received on this issue favored our proposal. Thus, we will continue to request information regarding minority- and women-owned status in the F block short-form applications. As we stated in the Notice, we believe that continuing to collect such information will assist us in analyzing applicant pools and auction results to determine whether we have promoted substantial participation in auctions by minorities and women, as we are directed by Congress, through the special provisions we make available to small businesses. This information will also assist us in preparing our report to Congress on the participation of designated entities in the auctions and in the provision of spectrum-based services. We also believe that such information will be relevant in developing a supplemental record should we find that special provisions for small businesses prove unsuccessful in encouraging the dissemination of licenses to a wide variety of applicants, including businesses owned by members of minority groups and women. B. Definitions 1. Small Business 57. Background. Under our current F block rules, a "small business" is defined as an entity that, together with its affiliates and persons or entities that hold interests in such entity and their affiliates, has average gross revenues of not more than $40 million for the preceding three years. In the Notice, we proposed to keep this definition for the F block, which is also used for the C block, to allow C block small business licensees to benefit from the small business provisions of the F block. However, we expressed concern that this threshold might prevent C block winners from acquiring F block licenses because of the value of their C block licenses, and we requested comment on whether the value of a C block license should be part of the gross revenues calculation. We also requested comment on whether we should define and adopt rules for very small businesses, and whether we should modify or simplify the affiliation rules. 58. Comments. Most commenters support our proposal to continue to define entities with $40 million or less in gross revenues as small businesses. Commenters advocating a change in our definition support using both lower financial tests and higher financial tests or looking at net worth and total assets rather than gross revenues. RAA proposes that any bidder intending to serve more than 5 million pops should not be considered a small business. Other commenters support changes to the affiliation rules. CSCI advocates modifying the definition of publicly traded companies with widely dispersed voting power to eliminate the 15 percent single entity ownership limitation. In other words, it requests that we allow publicly held companies in which a single person owns more than 15 percent of the equity to ignore its affiliates' and owners' revenues and assets for purposes of qualifying as a small business or entrepreneur. BellSouth supports redefining small businesses to promote the participation of very small businesses in spectrum-based services. 59. The comments are equally split on the issue of whether the value of licenses won in the C block auction should be considered in determining whether an entity is a small business. Arguments in opposition to considering the value of C block licenses include the assertion that the value of these licenses is offset by the liability of payments to the U.S. Treasury; that C block licensees plan to aggregate C and F block spectrum; that C block bidders' ineligibility to bid in the F block auction would unfairly limit them to acquiring 10 MHz licenses in the secondary market; and that we intended for entities qualifying as entrepreneurs or small businesses to continue to qualify regardless of financial growth. Arguments in favor of considering the value of C block licenses include: expanding the number of broadband licensees; improving opportunities for bidders that were unable to win licenses in previous broadband PCS auctions; and increasing opportunities for small businesses, including those owned by women and minorities. 60. Decision. We will continue to define small businesses as those entities that have gross revenues of not more than $40 million. Maintaining our $40 million definition of small businesses avoids disruption to the business plans of potential bidders, particularly participants in the C block auction. Additionally, however, we define a second tier of small businesses, which we will refer to as "very small businesses," as entities that, together with their affiliates and persons or entities that hold interests in such entities and their affiliates, have average gross revenues of not more than $15 million for the preceding three years. Creation of this subcategory of small businesses enables us to tailor our benefits to better meet the needs of bidders likely to participate in the F block auction. Smaller license size may mean that smaller businesses are likely to participate in the F block auction. Thus, as discussed above, our goals can best be served by offering varying bidding credits depending on the applicant's size. We believe that BellSouth's concern about furthering the interests of very small businesses is addressed in the tiered bidding credits that we adopt herein. We will not, however, redefine publicly traded companies with widely dispersed voting power to eliminate the 15 percent single entity ownership limitation as requested by CSCI. Applicants such as CSCI that believe that their individual ownership structures merit exemption from our general definition may request a waiver. 61. We decline to make special provisions for small business winners of C block licenses as requested by some commenters. As a practical matter, C block small business winners will likely not have accrued substantial gross revenues by the time we auction the D, E, and F blocks. Therefore, most of these winners should continue to qualify as small businesses. On the other hand, if they have grown in size beyond our established financial cap, or, if they can no longer avail themselves of our exception to the affiliation rules, they may no longer qualify as a small business. 2. Rural Telephone Company 62. Background. In the Notice, we sought comment on whether we should retain the current definition of rural telephone company or replace it with the definition contained in the 1996 Act. Our F block rules define a rural telephone company as "a local exchange carrier having 100,000 or fewer access lines, including all affiliates." In adopting this definition and geographic partitioning provisions, we indicated that it would facilitate the rapid deployment of broadband PCS to rural areas without giving benefits to large companies that do not require special assistance." The 1996 Act, which defines 'rural telephone company' to include a larger number of local exchange carriers, provides: Rural telephone company.--The term 'rural telephone company' means a local exchange carrier operating entity to the extent that such entity-- (A) provides common carrier service to any local exchange carrier study area that does not include either-- (i) any incorporated place of 10,000 inhabitants or more, or any part thereof, based on the most recently available population statistics of the Bureau of the Census; or (ii) any territory, incorporated or unincorporated, included in an urbanized area, as defined by the Bureau of the Census as of August 10, 1993; (B) provides telephone exchange service, including exchange access, to fewer than 50,000 access lines; (C) provides telephone exchange service to any local exchange carrier study area with fewer than 100,000 access lines; or (D) has less than 15 percent of its access lines in communities of more than 50,000 on the date of enactment of the Telecommunications Act of 1996. 63. Comments. Commenters are divided over whether the Commission should continue to use the definition of rural telephone company adopted in the Competitive Bidding Fifth Report and Order or the new definition contained in the 1996 Act. The PCS Coalition, the NY Coalition, USIW, the Alliance, and NTCA urge the Commission to retain its current definition. They contend that replacing the current definition with the 1996 Act's definition would extend benefits intended for smaller companies to larger carriers, undermining the goals of Section 309(j)(3)(B) and possibly enabling larger LECs to attempt to qualify as rural telephone companies. They also argue that the definition contained in the 1996 Act does not expressly override or replace any definitions that currently exist and that are outside the scope of the Act. Finally, they claim that many rural telephone companies have reasonably relied upon the current definition and have made their plans and formed their coalitions in reliance on this definition. 64. On the other hand, a number of commenters urge the Commission to amend its current definition of rural telephone company to conform with the definition contained in the 1996 Act. Auction Strategy claims that the definition should be changed to promote conformity and ease of regulation. GTE, Mid-Plains, TDS, and ALLTEL argue that the Commission should adopt the definition contained in the 1996 Act because it would increase the number of entities eligible for partitioning, which would help bring advanced service to rural areas more swiftly and increase the value of PCS licenses by increasing the number of entities qualified to acquire at least a portion of a license. ALLTEL, Mid-Plains, and TDS also contend that the 1996 Act's definition of rural telephone company is a definition of general applicability, indicating that Congress intended for it to apply to the entire Communications Act. 65. RTC, while opposing adoption of the new statutory definition for the F block auction, proposes expanding the current definition of rural telephone company to all LECs with less than 120,000 access lines (including all affiliates). Alternatively, if the Commission adopts the definition contained in the 1996 Act, RTC contends that newly enacted Section 251(f)(2) creates a de facto definition of rural telephone company limited to LECs "with fewer than 2 percent of the Nation's subscriber lines." Accordingly, LECs that serve fewer than 2 percent of the nation's subscriber lines, RTC proposes, should qualify as rural telephone companies for purposes of the Commission's PCS rules. 66. Decision. We agree with those commenters that support the Commission's use of the definition of rural telephone company contained in the 1996 Act. We find compelling the arguments of GTE and ALLTEL that this definition will increase the number of entities eligible for partitioning and expedite the delivery of advanced services to rural areas. Although this decision may result in larger rural telephone companies being eligible to partition licenses, we recognize that the number of access lines - including those provided by rural telephone companies - continues to grow rapidly as the uses of telecommunications services expand. Thus, most rural telephone companies will benefit from a definition that accounts for their growth. Indeed, as RTC points out, we previously increased the threshold number of access lines from 50,000 to 100,000 in order to reflect this growth, consistent with the purposes of Section 309(j)(3)(A). We also believe that adopting the 1996 Act definition for purposes of Section 309(j) will promote uniformity of regulations and is therefore consistent with the mandate of this legislation of easing regulatory burdens and eliminating unnecessary regulation. We believe that it is also consistent with our proposal to expand the availability of partitioned licenses generally. 67. We agree with commenters who assert that the definition is one of general applicability. We therefore elect not to adopt RTC's proposed definition contained in Section 251(f)(2) of the 1996 Act. This definition applies to rural telephone companies only in the context of suspensions or modifications of the application of certain statutory requirements to rural carriers. Absent a specific definition of rural telephone company for purposes of Section 309(j), and reading the statute as a whole, we are constrained to adopt the more generalized definition. C. Extending Small Business Provisions to the D and E Blocks 68. Background. We requested comment in the Notice on whether we should extend installment payment plans to small businesses bidding on the D and E blocks. We tentatively concluded that extending installment payments to the D and E blocks could increase the chances for all small businesses, including those that are women- and minority-owned, to win a D, E, or F block license and that it could increase opportunities for small businesses that are current PCS, cellular, or SMR licensees to obtain 10 MHz licenses that they could aggregate with their current licenses. 69. Comments. A majority of commenters advocate extending installment payment plans to small businesses in the D and E blocks. AirLink, for example, asserts that installment payments are particularly important in the D and E blocks because all bidders will be eligible to participate regardless of size. Omnipoint states that extending small business provisions to the D and E blocks will give small businesses a greater opportunity to aggregate 10 MHz licenses. Many commenters also propose extending bidding credits to the D and E blocks. 70. Commenters opposing the extension of installment payment plans to the D and E blocks argue primarily that small businesses receive ample opportunity to acquire 10 MHz licenses in the F block and that the market should decide the most efficient use of the remaining spectrum. BellSouth argues that our spectrum allocation plan for broadband PCS, including the C and F block set-asides, satisfies Congressional intent regarding designated entities. GWI argues that bidders in the C block auction valued the licenses in that auction based, in part, on the belief that the C block would be the only opportunity to rely on small business provisions to acquire 30 MHz broadband PCS licenses. It believes that offering an installment payment plan to small businesses on D and E block licenses could decrease the value of C block licenses at a time when C block licensees will be attempting to secure financing for their buildout. Other arguments in opposition to extending installment payments to the D and E blocks are that this approach would frustrate bidders' expectations created by the existing rules; it calls into question the rationale for the entrepreneurs' block; instead of awarding licenses to the entities that value them the most, it could result in awarding licenses to entities that value the government's loans the most; and it has given C block winners a windfall that should not be repeated in future auctions. 71. Decision. We decline to extend installment payment plans or any other special provisions to small businesses bidding on the D and E blocks. We believe that the special provisions for small businesses in the F block rules sufficiently further our objective of encouraging wide dissemination of broadband PCS licenses. We note that in the recently completed C block auction, almost 90 entrepreneurs and small businesses won 30 MHz broadband PCS licenses. Our F block rules will create additional opportunities for entrepreneurs and small businesses to acquire 10 MHz licenses. Further, since the F block is an entrepreneurs' block, it guarantees that one third of the 10 MHz broadband PCS licenses will be assigned to entrepreneurs and small businesses. Larger entities are prevented from acquiring F block licenses. 72. Commenters contend that we would undermine the justification for the F block as an entrepreneurs' block if we were to open the D and E blocks to special provisions for small businesses. We agree and believe that departing from our original plan to establish two contiguous blocks of broadband PCS spectrum for the exclusive use of entrepreneurs and small businesses is not warranted. We set aside one third of broadband PCS spectrum for small businesses and we believe this fulfills our obligation under Section 309(j). Many advocates of extending small business provisions to the D and E blocks argue that it will enhance competition for those licenses. We believe, however, that the auction of these two blocks will be very competitive, with participation by local exchange carriers, cellular carriers, PCS carriers, cable companies, public utilities, entrepreneurs and small businesses -- all of whom are eligible to bid for these licenses. D. Adjusting Payment Provisions for 10 MHz Licenses 73. Background. We recognized in the Notice that winning bids for the D, E, and F block licenses, which authorize the use of 10 MHz, could be lower than those for the 30 MHz A, B, and C block licenses. Accordingly, we sought comment on whether we should adjust the terms of our installment financing provisions to reflect the expected lower values of the 10 MHz licenses. Similarly, we sought comment on whether our F block rules establishing discounted upfront payments and reduced down payments for entrepreneurs should be adjusted. Our rules currently require participants in the F block auction to submit an upfront payment of $.015 per MHz per pop (or per bidding unit) for the maximum number of licenses (in terms of bidding units) on which they intend to bid. Winning bidders in entrepreneurs' block auctions are required to supplement their upfront payment with a down payment sufficient to bring their total deposits up to 10 percent of their winning bid(s). Under our current rules, a winning bidder in the F block auction would be required to submit five percent of its net winning bid within five days of the close of the auction, and the remainder within five days of the award of the license. 74. Comments. Some commenters took issue with our statement that winning bids for the D, E, and F blocks, because they are for 10 MHz licenses, could be lower than those for the 30 MHz A, B, and C blocks, generally arguing that license valuation is complex and subjective. For this reason, several commenters objected to adjusting the installment payment plans, upfront payments, or down payments. In contrast, Conestoga asserted that upfront payments and down payments should be lowered to reflect the expected lower value of 10 MHz licenses. 75. NCMC believes that it is not necessary to increase the down payment and upfront payment requirement because the Commission has not seen significant bidder default outside of IVDS. AirLink, on the other hand, supports increased upfront and down payments because they reduce the likelihood of bidder default. Western advocates a substantially increased upfront payment and suggests $.20 per MHz-pop. AT&T also urges the Commission to increase the upfront payment amount for all three spectrum blocks to ensure the availability of adequate funds to cover default payments and suggests a $.10 per MHz-pop upfront payment. AT&T further proposes that we require applicants to supplement their upfront payments during the auction whenever their payment balances fall below a certain percentage of their bids. Go argues that bidders should be required to submit an upfront payment equal to 20 percent of the total amount bid during auction. To simplify cross-over bidding by small businesses in the D and E blocks, Auction Strategy believes that upfront payments should be the same for all blocks and bidder types. With respect to the down payment requirement, Sprint advocates a 20 percent requirement for F block winners; PersonalConnect suggests 25 percent; and CIRI suggests 30 percent. 76. Decision. We do not dispute commenters' contentions that it is difficult to predict how high bids will go for the 10 MHz licenses given the disparity between the prices paid for the A and B block licenses and the high bids for the C block licenses. Whether the ultimate D, E, and F block bids are higher or lower than those for the 30 MHz licenses, however, we conclude that our installment payment plans and our upfront payment and down payment requirements should be adjusted. These adjustments are based primarily on the fact that license values in the A, B, and C blocks have exceeded expectations. We are also concerned, based on BDPCS's default in the C block auction, that there is a need to obtain a higher payment up front to guard against default. 77. We therefore modify the upfront payment requirement for the F block to raise it to the same level as the D and E block requirement and eliminate the discount previously provided to entrepreneurs. We originally discounted upfront payments for entrepreneurs because their down payment requirement was low (5 percent) and we were concerned that if we required them to pay upfront payments larger than the required down payment we might discourage their participation. Our experience to date, however, indicates that we have underestimated the value of spectrum and that upfront payments have not created a barrier to entrepreneur participation in our auctions. We also agree with Auction Strategy that requiring a uniform upfront payment (per bidding unit) of all bidders for D, E, and F block licenses will greatly simplify the auction process for bidders interested in bidding on two or more of the blocks. We also believe that if we conduct a single simultaneous multiple round auction of the D, E, and F block licenses, it is necessary for operational reasons to have the same upfront payment and activity requirements across all three blocks. 78. Further, because we want our payment terms to more accurately reflect the value of the licenses, we will raise the upfront payment requirement for all three blocks. We believe that this action is consistent with our policy reason for requiring upfront payments -- to deter insincere and speculative bidding and to ensure that bidders have the financial capability to build out their systems. Our formula for calculating upfront payments was intended to approximate 5 percent of the estimated license value. Based on the license values established in the completed PCS auctions, however, the formula of $0.02 per MHz- pop underestimates actual value. We also agree with AT&T's argument that increased upfront payments will accomplish the objective of providing adequate funds to cover default payments. We note, for example, that in the cases of the BDPCS and NatTel's defaults, we have insufficient funds on hand to cover their default payments. AT&T suggests $.10 per MHz-pop as the upfront payment for the D, E, and F blocks. We choose, however, to adopt an upfront payment of $.06 per MHz-pop for the D, E, and F blocks. Based on our analysis of the prices paid in the C block auction, we believe that such an upfront payment is sufficient to ensure sincere bidding and guard against defaults. This upfront payment for the D, E, and F blocks equals approximately 5 percent of the market value of the C block licenses. We also delegate authority to the Wireless Telecommunications Bureau to modify the upfront payment requirement for any C block licenses that are reauctioned in the future. We note that we also favor the approach suggested by AT&T that would require applicants to supplement their upfront payments during the auction to ensure that their payment is a certain percentage of their bids. Operationally we cannot implement this proposal at this time, but we will look for ways to implement it in future auctions. 79. For similar reasons, we also modify our rule governing down payments for the F block. We find that a 20 percent down payment, the same down payment that is required of D and E block auction winners, should be required of F block winners. Under this approach, F block entrepreneurs and small businesses will be required to supplement their upfront payments to bring their total payment to 10 percent of their winning bid within 5 business days of the close of the auction. Prior to licensing, they will be required to pay an additional 10 percent. The government will then finance the remaining 80 percent of the purchase price. We believe an increased down payment will provide us with strong assurance against default and sufficient funds to cover default payments in the unlikely event of default. Increasing the amount of the bidder's funds at risk in the event of default discourages insincere bidding and therefore increases the likelihood that licenses are awarded to parties who are best able to serve the public. E. Rules Regarding the Holding of Licenses 80. Background. Current rules allow no transfers or assignments of entrepreneurs' block licenses in the first three years after licensing and permit transfers and assignments to entrepreneurs in years four and five with no restrictions after year five. In the Notice, we tentatively concluded that our current transfer restrictions for F block licensees may be too restrictive and we proposed to amend the holding requirement to let all F block licensees transfer their licenses within the first three years to an entity that qualifies as an entrepreneur. 81. Comments. Most commenters agree with our proposal to relax the transfer restrictions for F block licensees. For example, Devon argues in favor of this proposal because it believes that it will ensure that spectrum is being used efficiently and that the public is being adequately served. Several commenters suggest that we should expand our proposal to include C block licensees also. For example, GWI asserts that because the C block auction and the F block auction are designed to serve the same statutory objective of ensuring opportunities for small businesses, the Commission's proposed change should apply to both blocks. Bear Stearns advocates relaxing the transfer restriction to give potential lenders and investors more assurance that in case of financial distress, it will be possible to replace the original entrepreneur with another qualifying entrepreneur in advance of an actual default. Other alternatives to our proposed rule change offered by commenters include eliminating the three-year restriction completely; instituting a permanent requirement that licenses be transferred only to like entities; and allowing transfers to small and very small businesses but not to entrepreneurs or other entities. Further, KMTel proposes that we eliminate the unjust enrichment provisions for the C block contained in Sections 24.711(e) and 24.712(d) of our rules because bidders have effectively "bid away" the discounts. Finally, DCR requests that we clarify that our transfer restriction does not apply to pro forma transfers or assignments. 82. AirLink and Conestoga, on the other hand, oppose our proposal because they believe that it will fuel speculation and possibly collusion. Sprint argues in favor of the current rule because it believes that it is not too restrictive and that it should be kept consistent with the C block rule. 83. Decision. We will relax the holding requirement for the F block auction winners. Specifically, we will modify the rule to permit transfers and assignments of licenses to other entrepreneurs, including small businesses, in the first five years after license grant. We further agree with GWI and Bear Stearns that it is appropriate to make the same rule change for the C block. We believe that modifying the rule in this manner provides entrepreneurs' block winners with flexibility to engage in market transactions that do not undermine our stated objective of promoting a diverse and competitive PCS market. 84. Our holding rule was established to ensure that designated entities do not take advantage of special entrepreneurs' block provisions by immediately assigning or transferring control of their licenses to non-entrepreneurs. We indicated that trafficking of licenses in this manner would unjustly enrich the auction winners and would undermine the congressional objective of giving designated entities the opportunity to provide spectrum-based services. After considering the record in this proceeding, we conclude that allowing transfers and assignments in the first five years -- but only to entrepreneurs -- provides a sufficient safeguard to satisfy our concerns. A restriction on transfers and assignments for five years, rather than three years, ensures that an entrepreneur will hold and build out the license until the first construction benchmark. We also have the experience of the C block auction behind us, and understand that our strict holding requirements may actually be hampering the ability of entrepreneurs to attract the capital necessary to construct and operate their systems. In particular, lenders and investors have expressed concern about the need for more flexibility in the event of financial distress and default. Because we do not want investors to shy away from financing C and F block winners due to such concerns, we modify our holding rule today in a manner that continues to promote small and entrepreneurial ownership in broadband PCS licenses. 85. We believe that our amendment to the holding requirement serves the public interest by helping to ensure rapid and uninterrupted service to the public. We agree with Bear Stearns that market-oriented solutions in the event of financial distress will help avoid PCS license defaults to the Commission and the accompanying investor and/or service disruption that such defaults engender. Market-oriented solutions to problems of financial distress will often be preferable to the FCC reclaiming and reauctioning licenses, and we believe this amendment will promote such a result by allowing transfers to entrepreneurs who may be better prepared than the original licensee to construct and provide service. We thus amend Section 24.839 of our rules to permit the transfer of entrepreneurs' block licenses in the first five years to any entity that either holds other entrepreneurs' block licenses (and thus at the time of auction satisfied the entrepreneurs' block criteria) or that satisfies the criteria at the time of transfer. There will be no restrictions on transfers after the fifth year. We note, however, that our unjust enrichment provisions will continue to apply as before. We further amend our holding rule to exempt pro forma transfers and assignments because trafficking concerns do not exist under such circumstances. III. The Cincinnati Bell Remand A. The Cellular/PCS Cross-ownership Rule 86. Background. In light of the Sixth Circuit's ruling in Cincinnati Bell remanding the Commission's rule limiting cellular operators' eligibility for PCS licenses, we asked for comment on whether our cellular/PCS cross-ownership rule should be relaxed or retained. Under this rule, no cellular licensee may be granted a license for more than 10 MHz of broadband PCS spectrum prior to the year 2000 if the grant will result in a significant overlap of a cellular licensee's Cellular Geographic Service Area ("CGSA") and the PCS service area. After the year 2000, cellular licensees will be allowed to obtain a grant of 15 MHz of PCS spectrum in an area that overlaps significantly with their CGSA. We asked commenters to address whether there are reasons for maintaining the separate cellular/PCS cross-ownership provisions or the 40 MHz PCS spectrum cap, or, on the other hand, whether we should eliminate these caps in favor of a single, more relaxed 45 MHz CMRS cap. 87. Comments. Most commenters support relaxing and simplifying our cellular/PCS ownership limitations by implementing a single spectrum cap. A majority of those commenters that support a single cap suggest eliminating the cellular/PCS and general PCS spectrum caps in favor of the single 45 MHz CMRS spectrum cap. Such commenters believe that the 45 MHz spectrum cap for all CMRS is an adequate check on the power of cellular licensees to influence the broadband PCS market. More specifically, they argue that there is little risk that a cellular licensee will exert undue market power if allowed to acquire 20 MHz of broadband PCS spectrum. For instance, GTE argues that the high cost of acquiring PCS licenses and constructing systems will adequately deter cellular companies from acquiring such licenses purely to prevent competition. Additionally, CTIA argues that the risk to innovation by limiting cellular providers' participation in broadband PCS is a greater concern than the risk of increased market concentration or undue market power. CTIA asserts further that relaxing cellular carriers' ownership restrictions would be good for consumers because it would result in better service and lower prices. CCPR asserts that, with two cellular licensees, enhanced SMR, mobile satellite service, and at least three facilities-based PCS market entrants soon to be in every service area, the competition in mobile telephony promises to be frenzied and true price competition among mobile telephony providers exists. According to BellSouth, the 45 MHz CMRS cap will prevent cellular carriers from exerting undue market power and will not give cellular carriers a competitive advantage because it will ensure that there will be at least five separate broadband CMRS providers in each market. 88. CTIA suggests that if a single 45 MHz CMRS spectrum cap is maintained, the percentage of population overlap between service areas which triggers this rule should be increased from 10 percent to 40 percent. CTIA argues that the overlap restriction should be relaxed because the risk of collusion among competitors is lower than is first apparent. CTIA further contends that in order for the weighted average market share of a cellular licensee acquiring a 30 MHz PCS license to exceed the 23.5 percent market share allowed a non-cellular licensee under the 40 MHz PCS cap, the population overlap would have to exceed 40 percent. The Alliance proposes that MTA pops be used to calculate overlap for BTA licensees who own or acquire cellular systems within that BTA. Western argues that the 10 percent standard for population overlap should be raised to at least 20 percent. Western contends that permitting cellular licensees to dovetail the irregular boundaries of cellular markets with PCS markets would promote seamless wireless coverage since a PCS licensee that already provides service in rural areas on its cellular facilities is more likely to provide seamless coverage and provide wireless service to rural areas than non-cellular licensees. 89. Radiofone asserts that the Commission should eliminate the cellular/PCS cross- ownership rule because there is no evidence to support such a rule, and that the 45 MHz CMRS spectrum cap should also be eliminated because it forecloses businesses such as Radiofone from obtaining a 30 MHz PCS license. Radiofone contends that limiting cellular carriers to 20 MHz of PCS spectrum under the 45 MHz cap is as arbitrary as limiting them to 10 MHz under the cellular/PCS cross-ownership rule, and that the cap should be eliminated for all PCS auctions. Radiofone also argues that changes in the spectrum caps should be applied to all of the broadband PCS licenses in the MTAs and BTAs where Radiofone and its affiliates provide cellular service. GTE also opposes any CMRS spectrum aggregation limits on the grounds that they unduly restrain legitimate business activities and are not supported by any evidence. GTE asserts, however, that if the Commission adopts a cap, the 45 MHz CMRS cap is sufficient on its own to ensure diversity of ownership. 90. APC argues that the proposal to eliminate the 40 MHz PCS spectrum cap is not called for either by Cincinnati Bell or by current marketplace conditions. APC contends that the 40 MHz cap has been successful in promoting competition, as shown by the numerous new market entrants that have emerged to bid aggressively on the 30 MHz PCS licenses. APC further argues that changing the rules at this late juncture would undermine the companies' reliance on the rules. Gulfstream also argues that A, B, and C block licensees should not be allowed to obtain a 10 MHz PCS license because this would encourage spectrum warehousing. 91. Several commenters contend that the existing cross-ownership rule should be retained. Sprint argues that liberalizing the rules after they have been in effect during the A, B, and C block auctions could seriously disadvantage entities that made business decisions based on the existing caps and thus invite legal challenge. TEC believes that the current rules ensure a competitive market since cellular licensees are the only companies providing large-scale wireless telephone service to the public and PCS is a potential competitor in this market. DCR asserts that cellular companies would have a distinct advantage over small companies if their entry into PCS were not restricted because cellular companies already have name recognition, existing systems, and the use of free spectrum. DCR also argues that a cellular provider is more likely to use its PCS license to offer new services in a new market where it has no preexisting infrastructure of its own than in a geographic area where it has existing infrastructure and may instead expand its cellular subscriber base. OmniPoint contends that the cellular/PCS cross-ownership rule is still needed because cellular providers still maintain substantial market power and advantages over new entrants, such as a strong customer base, duopoly profits for reinvestment in system infrastructure, and greater flexibility and opportunities for site locations. Cox argues that removing the cellular/PCS cross-ownership cap or expanding the existing cap threatens the development of PCS as a stand-alone competitor to cellular and could relegate it to secondary status as a complementary service to cellular. Cox also argues that any move to adopt a single CMRS spectrum cap and eliminate the PCS and cellular/PCS spectrum caps must address the fact that while cellular providers could easily aggregate PCS spectrum to reach the CMRS cap with two 10 MHz PCS licenses, PCS providers will be able to acquire the same amount of spectrum only if they aggregate SMR frequencies. NCMC argues that relaxation of the existing caps would only encourage warehousing of CMRS spectrum. 92. KMTel and NCMC suggest that the Commission tighten its cellular/PCS cross- ownership rule and PCS spectrum cap. Both commenters support prohibiting cellular companies from holding any D, E, and F block PCS licenses where they already have cellular interests. NCMC argues that the C block auction results provide new evidence that the Commission has not avoided excessive concentration of ownership or ensured the dissemination of licenses to a wide variety of applicants. 93. PersonalConnect and NCMC argue that the CMRS cap should be reduced to a 35 MHz limit. NCMC contends that a 35 MHz cap would put all CMRS providers on level footing. 94. Decision. We agree with the majority of commenters that a spectrum cap is necessary in order to avoid excessive concentration of licenses and promote and preserve competition in the CMRS marketplace. We thus decline to accept the suggestions of Radiofone and GTE that we eliminate all limitations on the amount of spectrum a single entity (or affiliated entities) may acquire. For the reasons set forth below, we will maintain the 45 MHz CMRS spectrum cap and eliminate the PCS and cellular/PCS spectrum caps. Although we eliminate the 35 MHz cellular/PCS spectrum cap remanded by the Sixth Circuit in favor of the less restrictive 45 MHz CMRS spectrum cap, we also provide below additional economic support for limits on ownership of CMRS licensees. 95. We adopted the 45 MHz CMRS spectrum cap in the CMRS Third Report and Order in order to "discourage anti-competitive behavior while at the same time maintaining incentives for innovation and efficiency." We were concerned that "excessive aggregation [of spectrum] by any one of several CMRS licensees could reduce competition by precluding entry by other service providers and might thus confer excessive market power on incumbents." The continuation of the 45 MHz spectrum cap will promote competition and prevent anti-competitive horizontal concentration in the CMRS business. Up to a point, horizontal concentration can allow efficiencies and economies that would not be achievable otherwise, and can therefore be pro-competitive, pro-consumer, and in the public interest. At some point, however, horizontal concentration starts to work against those goals because it results in fewer competitors, less innovation and experimentation, higher prices and lower quality, and these disadvantages outweigh any advantages in terms of economies and efficiency. 96. For determining when concentration reduces competition to an undesirable level, one accepted tool is the Herfindahl-Hirschman Index ("HHI"), which is used in the Department of Justice and Federal Trade Commission Horizontal Merger Guidelines to measure market concentration. It has been accepted by courts and this Commission in numerous cases as a preliminary test of permissible and impermissible horizontal concentration. We find the HHI to be useful in the present situation because we lack empirical data about the actual performance of a market that includes both cellular service and fully deployed broadband PCS, which is under construction in almost all markets. An HHI analysis produces a number showing the degree of horizontal concentration in the market: an HHI of less than 1,000 shows an unconcentrated market, in which horizontal concentration is not a concern; an HHI between 1,000 and 1,800 shows a moderately concentrated market, in which certain ownership combinations "potentially raise significant competitive concerns depending on [certain] factors"; and an HHI over 1,800 shows a highly concentrated market, in which certain combinations "are likely to create or enhance market power or facilitate its exercise" unless a strong showing to the contrary is made. In order to apply the HHI, a measurement of market share (e.g., in terms of customers, revenues, capacity or similar gauges) is necessary. Allocated spectrum is an appropriate measurement of market share for the purpose of analyzing the need for a spectrum cap because it is a measure of a CMRS carrier's long-term capacity and is easily available to the Commission. Capacity has been accepted in antitrust cases as a valid measure of market share. The 45 MHz CMRS spectrum cap is a simplified version of the HHI, using spectrum capacity as the measurement of market share as it limits the amount of licensed spectrum capacity that any one person or entity may have. 97. In addition to considering the arguments presented by commenters in this proceeding and in response to the Sixth Circuit's concern about the lack of economic support for the cellular/PCS spectrum cap, the Commission's competitive analysis staff performed an HHI analysis for various possible structures of a hypothetical market for mobile two-way voice communications service in the same geographic area. This analysis is set forth at Appendix A. In this market, the capacity in a local market is represented by the licensed spectrum for cellular service (two licenses for 25 MHz), broadband PCS (three licenses for 30 MHz and three licenses for 10 MHz), and the largest potential interconnected SMR provider (holding multiple licenses for a total of 10 MHz). 98. The Commission staff's HHI analysis indicates that the 45 MHz CMRS spectrum cap is needed to prevent undue market concentration and the noncompetitive conditions in local markets that result from such concentration. The pre-PCS market situation, consisting of two cellular carriers each with 25 MHz has an HHI of 5,000 -- extremely high concentration. The two, overlapping cellular carriers are already prohibited from owning more than a 5 percent interest in each other. The addition of a third carrier, an SMR provider with 10 MHz, lowers the HHI only to 3,750. Adding the spectrum capacity provided by the issuance of new PCS licenses, if there was no spectrum cap, might result in the two cellular incumbents dividing all the PCS spectrum between themselves. With no new entrants, this would leave the HHI at its previous high level, defeating a major purpose of the Commission in creating broadband PCS -- to bring more competition into the concentrated mobile telephony market. The analysis also shows that, even if there was somewhat less common ownership of PCS spectrum by incumbent cellular operators, the market would still be very highly concentrated without a cap on the ownership of spectrum capacity. For example, if each cellular carrier obtained a 30 MHz PCS license and a 10 MHz PCS license, another 40 MHz of PCS spectrum were held by a new entrant, and the SMR operator remained at 10 MHz, the HHI would still be 3133, far into the "highly concentrated" category. 99. In addition to these hypothetical results if there is no spectrum cap, we note that there are other factors that create a significant risk of such excessive concentration becoming reality. First, while new entrants can de-concentrate many businesses, CMRS markets have significant barriers to entry, most notably the need for spectrum, the expense of obtaining the license and the high costs of construction and operation of new communications systems. Thus, there would be little potential for new entrants to discipline the behavior of the incumbents in the absence of any spectrum cap. Second, the use of competitive bidding for assigning PCS licenses, or the cost of obtaining licenses in a post-auction market (i.e., private auctions), would put incumbents at an inherent advantage over new entrants. Economic theory teaches that auctions are won by the bidder who puts the highest value on the property being auctioned. The value of the PCS licenses to the incumbent providers would be their continued economic rents (profits in excess of economic costs), which could be higher than the anticipated profits of any new entrant into a more competitive market. Incumbent firms may thus be willing to pay even more for the chance to impede entry than for the chance to compete vigorously against new entrants. In such an event, the incumbent cellular and SMR licensees would be more likely to win all or most of the PCS licenses at auction, or pay above auction prices in the private, post-auction transactions. Accordingly, Congress specifically instructed the Commission to craft its rules for auctionable spectrum licenses to avoid excessive concentration of licenses and provide economic opportunities to a wide variety of applicants. 100. Having a 45 MHz CMRS spectrum cap, in contrast to the above-described scenarios without a spectrum cap, will result in a market that has an HHI below 1,900, a tremendous improvement over a two- or three-competitor market. Although some scenarios under the 45 MHz cap could produce an HHI above 1800 (i.e., 1898), which the DOJ/FTC Guidelines would characterize as a highly concentrated market, we believe that, due to certain factors, the risk that significant competitive harm will occur is probably low in most cases. First, there are several other communications services each of which has some, though by no means full, cross-elasticity with cellular, broadband PCS, and interconnected SMR services. These other services are paging, narrowband and unlicensed PCS, 220 MHz service, air- ground service, maritime service, satellite-based mobile services, General Mobile Radio Service, General Wireless Communications Service, interconnected private radio systems, CB radio and other "low end" services, government radio systems, resellers of the foregoing services, and some wired local exchange service. Collectively, these services exert some competitive pressure on cellular, broadband PCS and interconnected SMR that is not reflected in the HHIs calculated by the Commission's competitive analysis staff. There is significant precedent for the use of such competitors as a mitigator of HHIs that are above optimum levels. Also, under the DOJ/FTC Guidelines, a highly concentrated market produces competitive concerns depending on certain factors, including how easy or difficult "coordinated interaction" is among the competitors, and whether entry by new competitors will be possible. Most plausible scenarios under the 45 MHz cap show at least six competitors, reducing the risk of coordinated interaction. With respect to entry, as the Commission allocates and assigns spectrum for more services that have some cross-elasticity of demand with broadband CMRS (cellular, broadband PCS, and wide-area SMR), a certain amount of increased competition from new competitors could open up more opportunities to enter the market. Additional opportunities to obtain spectrum may also arise through rules allowing for spectrum disaggregation and geographic partitioning, which are currently under consideration by the Commission. In addition, the Commission is taking other significant steps to reduce entry barriers for entrepreneurs and small businesses pursuant to Sections 309(j)(3), 309(j)(4) and 257 of the Communications Act. Given these factors, we believe that concentration levels of 1,900 are acceptable and we conclude that the 45 MHz spectrum cap is necessary to prevent the CMRS market from becoming highly concentrated and to avoid an excessive concentration of licenses. 101. The 45 MHz spectrum cap is also needed specifically to prevent cellular licensees from gaining too great a competitive advantage over new entrants to the wireless telephony market. Cellular companies already hold licenses for 25 MHz of clear spectrum, and they already have technical expertise, customer bases, marketing operations, and antenna and transmitter sites. In short, cellular operators have a competitive position that is superior to that of any new market entrant. They also have strong incentives to preserve that existing advantage. By limiting current cellular licensees to an additional 20 MHz of spectrum (i.e., two of the three 10 MHz broadband PCS licenses), the 45 MHz cap will help to level the playing field for all new entrants, while ensuring that incumbent providers are not placed at any disadvantage. We therefore disagree with Radiofone's assertion that the 45 MHz CMRS spectrum cap should be eliminated because it arbitrarily prevents cellular carriers from obtaining large amounts of PCS spectrum. 102. Our 45 MHz spectrum cap also furthers the goal of diversity of ownership that we are mandated to promote under Section 309(j). Section 309(j) directs us, in specifying eligibility for licenses and permits, to avoid excessive concentration of licenses and disseminate licenses among a wide variety of applicants. The statute further states that in prescribing regulations, the Commission must, inter alia, prescribe area designations and bandwidth assignments that promote economic opportunity for a wide variety of applicants. A spectrum cap is one of the most effective mechanisms we could employ to achieve these goals. More than provisions such as bidding credits and installment payments, which we have adopted to provide opportunities for new entrants in the wireless telephony marketplace, a spectrum cap set at an appropriate level will ensure that the licenses for any particular market are disseminated among diverse service providers. The Cincinnati Bell decision questioned whether the cellular/PCS spectrum limit actually advanced this statutory objective. We note, however, that following the first auction for broadband PCS licenses, the number of competitors in every local market in the country doubled, from 2 to 4 licensees. In addition, the C block auction resulted in another new competitor in each local market -- 493 licenses will soon be awarded to just under 90 small and entrepreneurial businesses. With the cellular/PCS spectrum limit in place, American consumers were guaranteed and received three new competitors to the two cellular incumbents. Accordingly, we affirm that the cellular/PCS spectrum cap fulfilled the mandate of section 309(j) and the 45 MHz cap will continue to serve those objectives in future auctions and the post-auction market. 103. The court in the Cincinnati Bell decision was also concerned that the cellular/ PCS spectrum cap would "have a profound impact on businesses in an industry enmeshed in this country's telecommunications culture." It stated that "[t]he continued existence of some wireless communications businesses rests on their ability to bid on Personal Communications Service licenses" and that "Cellular providers foreclosed from obtaining Personal Communications Service licenses may ultimately be left holding the remnants of an obsolete technology." Upon further analysis, as discussed above, we have modified our rules in a way that provides cellular licensees additional flexibility to expand into or migrate to PCS technology. Under the old rule, they were limited to one 10 MHz block until the year 2000. The shift to a single 45 MHz spectrum cap will allow incumbent cellular operators to acquire up to two of the 10 MHz broadband PCS licenses (20 MHz) in the upcoming auction for the D, E and F blocks. As many commenters point out, an additional 20 MHz of spectrum will be sufficient to develop and provide new digital services. We note that cellular carriers have also been rapidly implementing digital and other new technologies with their current 25 MHz of spectrum and that even analog cellular systems are increasing subscribership and providing enhanced services. 104. While our analysis of the CMRS market under the DOJ/FTC Guidelines indicates that the 45 MHz spectrum cap is needed to ensure competition, it also shows that this cap adequately addresses our concerns about anticompetitive behavior. Indeed, our analysis of plausible market structures indicates that the concentration levels under the single 45 MHz spectrum cap would not be higher than the level that would be possible under all three of the existing caps. Thus, we conclude that the PCS and cellular/PCS spectrum caps are unnecessary. 105. We also believe that elimination of the cellular/PCS cross-ownership rule and the 40 MHz PCS spectrum cap in favor of the single 45 MHz CMRS spectrum cap has important advantages. Applying the single 45 MHz CMRS cap will give both cellular and PCS providers more flexibility to participate in a more competitive marketplace. A single 45 MHz cap will now enable cellular licensees to obtain 20 MHz of broadband PCS spectrum. We believe that with the advent of digital and other new technologies, 20 MHz of PCS spectrum will be more than sufficient to allow cellular licensees to develop new services in the CMRS market. Furthermore, we disagree with APC that current marketplace conditions do not call for a change in our PCS rules. As APC notes, numerous new market entrants have emerged to bid aggressively on the 30 MHz PCS licenses. Given this source of new competition, we believe it is appropriate to relax our PCS ownership restrictions. The elimination of the cellular/PCS and PCS limits will give PCS providers greater flexibility to own interests in other providers and provide additional services and, hence, enhanced opportunities to compete. In addition, PCS providers will no longer be restricted to less than a 5 percent ownership interest in cellular and other PCS licensees in order to avoid attribution. Instead, they will be subject to the more liberal 20 percent attribution level for all CMRS. 106. We also note that the 1996 Act requires the Commission to determine in every even-numbered year (beginning with 1998) "whether any regulation is no longer necessary in the public interest as the result of meaningful economic competition between providers of such service" and to modify or repeal such regulation. In an effort to streamline our regulations now, consistent with the spirit of the 1996 Act, and in light of the findings set forth above, we believe that simplifying our rules to include a single 45 MHz CMRS cap in place of the three separate spectrum caps is warranted. In addition, at the next biennial review of the Commission's regulations under the 1996 Act and in our annual reports on the state of competition in the CMRS market, we will continue to evaluate the need for the 45 MHz spectrum cap in its present form. 107. We decline to alter the 10 percent overlap restriction for the CMRS cap as some commenters suggest. We continue to believe that an overlap of less than 10 percent of the population is sufficiently small that the potential for exercise of undue market power by the cellular operator is slight. Given our decision to eliminate the cellular/PCS and PCS ownership limitations, we are also concerned that greater overlap might lead to anticompetitive practices. We will, however, expand the post-auction divestiture provisions of Section 20.6 to conform with the divestiture provisions that previously applied in our cellular/PCS cross-ownership rule, including the relaxed rule applicable to situations where the overlap exceeds 10 percent, but is less than 20 percent. Thus, any party holding an attributable ownership interest in a CMRS licensee may be a party to a broadband PCS application if it certifies that, if necessary, it will come into compliance with the CMRS spectrum cap through our post-auction divestiture procedures. B. The 20 Percent Attribution Standard 108. Background. Section 24.204(d)(2)(ii) of our rules provides that partnership and other ownership interests and any stock interest amounting to 20 percent or more of the equity or outstanding stock of a cellular licensee will be attributable for purposes of determining whether an entity is a cellular operator and subject to the cellular/PCS cross- ownership rule. Section 24.204(d)(2)(ii) of our rules also provides that cellular ownership interests held by small businesses, rural telephone companies, and businesses owned by minorities or women are not attributable until they reach at least 40 percent. The Court in Cincinnati Bell held that our 20 percent cellular attribution rule was arbitrary on the ground that the rule does not bear a reasonable relationship to whether a party with a minority interest in a cellular licensee actually has the ability to control that licensee. 109. In the Notice, we requested comment on whether we should retain or modify our ownership attribution rule for cellular licensees interested in acquiring broadband PCS licenses. Given other issues raised in the Notice, we asked whether our approach should depend on whether we modify our cellular/PCS cross-ownership rule or, in the alternative, eliminate this rule and retain only our 45 MHz CMRS spectrum cap. We also asked whether we should, in any case, modify the 20 percent attribution standard applicable to the 45 MHz CMRS spectrum cap in light of the Sixth Circuit's opinion regarding this standard in connection with our cellular/PCS cross-ownership rule. We also proposed to modify the 40 percent attribution rules related to both the cellular/PCS cross-ownership and CMRS spectrum aggregation limit provisions for F block purposes, as we did for the C block, by removing the provisions that increase the attribution threshold to 40 percent if the holder of the ownership interest is a woman- or minority-owned business. 110. Comments. Many commenters assert that the 20 percent attribution standard should not be altered. Vanguard argues that most of the principal cellular companies are now publicly traded and, therefore, a 20 percent interest held by a single shareholder clearly would create the possibility of at least de facto control. Cox opposes a "controlling interest" test because it would be ineffective, subject to undetectable manipulation, and difficult to enforce. Furthermore, Cox asserts that bright-line attribution rules traditionally have been used by the Commission as an effective and efficient means of identifying cognizable opportunities for influence and control, and in fact, the Commission has used a lower standard (e.g., 5 percent) in other services. DCR argues that control is not the Commission's concern in determining what level of investment should be considered a cognizable interest. Rather, the Commission has traditionally been concerned with the potential for significant influence over management or operational decisions. Where that concern is especially significant, as it is here, the Commission has generally and reasonably opted for a more inclusive attribution rule. TDS contends that the attribution levels for all of the existing spectrum caps should remain the same in order to avoid uncertainty about competitive entry opportunities and delay of service due to litigation. Conestoga, the Alliance, and Cox also support our proposal to adopt a 40 percent attribution standard for small businesses and rural telephone companies as we did for the C block. 111. TEC, Mountain Solutions, and OmniPoint argue that a stricter 10 percent attribution standard, such as that promulgated by Congress in the definition of "affiliate" in the 1996 Act, should apply to the cellular/PCS cross-ownership rule. TEC and Mountain Solutions further argue that use of a statutory benchmark should prevent further court challenge. In contrast, however, CBT contends that nothing in the 1996 Act suggests that the 10 percent standard should be applied for attribution purposes in PCS licensing. 112. Several commenters assert that a control test should be used for attribution purposes instead of a bright-line standard. They argue, inter alia, that a bright-line standard does not effectively determine control in most cases and, instead, control must be determined under the specific facts of each case. They assert that the Commission should consider a standard based on control in light of the Commission's previous failure to examine less restrictive alternatives to a bright-line rule. Western also argues that the Commission should focus primarily on those ownership interests that it has recognized in the context of cellular/PCS ownership restrictions as potentially having the most anticompetitive effect (i.e., controlling interests). 113. CBT contends that a single majority shareholder exception should apply to the existing attribution rule. Specifically, CBT suggests that no minority stock or limited partnership interest should be attributable if a single holder (or group of affiliated holders) owns more than 50 percent of the outstanding stock or partnership equity or has voting control of the licensee's affairs. CBT also argues that no commenter has presented any new reason for or evidence supporting a 20 percent attribution rule. 114. CTIA argues that the attribution level should be increased from 20 percent to a level between 30 and 35 percent. CTIA asserts that the danger of undue market power in a single firm is sharply constrained by the 45 MHz CMRS spectrum cap, under which a controlling shareholder is limited to a market share of 26.5 percent, a percentage well below the 35 percent threshold recognized to be necessary for undue market power. CTIA also supports adoption of a single majority shareholder exception to its suggested higher attribution level. AT&T and RTC suggest that if a control-based rule is not adopted, then a 40 percent threshold, as applied to small businesses and rural telephone companies in the C block, should apply because there is no evidence that this level has created opportunities for anticompetitive behavior. 115. ICGC and ONE argue that the attribution rules adopted in the Competitive Bidding Fifth Report and Order should be reinstated. They contend that this approach will create meaningful opportunities for small businesses in accordance with Congressional intent. 116. GTE and DCR argue that any change to the attribution rule should be applied prospectively because retroactive application of any rule changes would be harmful to PCS licensees, would not serve the public interest, and would be contrary to federal law. In contrast, CBT believes that because the old attribution rule was defective from the start, any licensing that took place under the old rule is of questionable validity and those aggrieved by the old rule should be allowed to obtain redress. 117. Decision. Our decision to eliminate the 35 MHz cellular/PCS spectrum cap renders the issue of whether to modify the attribution standard of Section 24.204(d) of our rules moot. We reaffirm, however, the 20 percent attribution standard for the purpose of determining whether an entity is subject to the 45 MHz CMRS spectrum aggregation limit. We also conclude that the attribution standard for the 45 MHz spectrum cap should be made race- and gender-neutral such that a 40 percent attribution standard applies to all small businesses and rural telephone companies. We believe that extending the 40 percent threshold to noncontrolling investors in small businesses as we did for the C block licenses will promote additional investment in small business applicants and ensure broad participation in PCS by designated entities. 118. We agree with Vanguard that a 20 percent interest held by a single entity would create a possibility of de facto control. Such an interest (whether 20 percent or less) that conveys to its holder actual working control (including investor control) is already attributable under our rules. We believe generally, however, that even an entity that does not have de facto or de jure control but owns a 20 percent or more interest in a licensee would have sufficient influence to reduce competition and should be subject to the CMRS spectrum aggregation limit. Historically, we have included for attribution purposes those ownership and other interests that convey a degree of control or "influence" to their holder sufficient to warrant limitation. "Influence" has been viewed as "an interest that is less than controlling, but through which the holder is likely to induce a licensee or permittee to take actions to protect the investment." We note that attribution rules for other services typically apply much lower ownership benchmarks of 5 to 10 percent. Both cable and broadcast use a 5 to 10 percent attribution level. In the broadcast multiple ownership context, for example, any interest amounting to 5 percent or more of the outstanding voting stock of a corporate broadcast licensee, cable television system or daily newspaper is attributable. Interests held by certain passive investors are attributable if they amount to 10 percent or more of the outstanding voting stock. In the contexts of cable operator/broadcast network cross- ownership, cable national subscriber (horizontal) limits, cable channel occupancy (vertical) limits, and the MDS/cable cross-ownership limit, the attribution standards are identical to those used in broadcasting. We further note, as do some commenters, that the 1996 Act defines "affiliate" as a "person that . . . owns or controls, is owned or controlled by, or is under common ownership or control with, another person. . . [The] term 'own' means to own an equity interest (or the equivalent thereof) of more than 10 percent." 119. We continue to believe that a higher benchmark of 20 percent should apply for purposes of the CMRS spectrum cap in order to encourage capital investment and business opportunities in CMRS. Given the changing technology and the variety of competing services that will be subject to this limitation, we believe that increased flexibility in our rules will enable CMRS providers to adapt their services to meet customer demand. Furthermore, we originally adopted a 20 percent attribution level in our cellular/PCS cross-ownership rules to allow partial owners of cellular licensees to participate in PCS, in light of several partial and often passive ownership interests that may have resulted from early settlements during the initial phase of cellular licensing. We continue to believe that cellular providers should be given ample opportunity to compete in the CMRS market, given the role that existing infrastructure and technologies can play in speeding the deployment of new technologies. Thus, we believe that maintaining a 20 percent attribution level for the CMRS cap will allow a wide variety of players (i.e., PCS, cellular and SMR providers) to enter the marketplace while still preventing anticompetitive practices that would have harmful effects on consumers. 120. We disagree with commenters who suggest that only controlling interests should be attributable. Establishing a control test would require us to conduct frequent case-by-case determinations of control, which are time-consuming, fact-specific, and subjective. The bright line 20 percent attribution rule avoids these problems. Also, for the reasons discussed below, a single majority shareholder exception to the rule is not appropriate for all situations involving CMRS licensees and their owners, and so adoption of such an exception is not a suitable bright line substitute for 20 percent attribution. However, we adopt a less restrictive alternative and allow licensees with non-controlling minority investors with potentially conflicting CMRS ownership interests to seek waivers of the spectrum cap rule where the licens