NOTICE ************************************************************************* NOTICE ************************************************************************* This document was originally prepared in Word Perfect. If the original document contained-- * Footnotes * Boldface & Italics --this information is missing in this version The document format (spacing, margins, tabs, etc.) is changed too. If you need the complete document, download the Word Perfect version. For information about downloading documents (FTP) see file pnmc5021. File pnmc5021 (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ************************************************************************* Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) Interactive Video and Data ) Service (IVDS) Licenses ) ) Various Requests by ) Auction Winners ) MEMORANDUM OPINION AND ORDER Adopted: September 5, 1996 Released: October 4, 1996 By the Commission: I. INTRODUCTION AND EXECUTIVE SUMMARY 1. By this Memorandum Opinion and Order, we resolve requests for reconsideration of our previous Order in the above-captioned matter. Specifically, we address issues regarding transfer of bidding credits, the installment payment plan, and limitations on eligibility and bidding for reauctioned licenses in the Interactive Video and Data Service (IVDS). Petitioners won their licenses in the initial IVDS auction held July 28 and 29, 1994. For the reasons discussed herein, we affirm our decisions in the Order. II. BACKGROUND 2. The licenses were granted on either January 18 or February 28, 1995. On December 12, 1995, Community Teleplay, Inc. (CTI), filed an "Informal Request for Commission Action." On January 11, 1996, AG Partners, Friends of IVDS, IVDCO LLC, IVDS/RLV Partnership, Infopower International, Nanowave Technologies, New England Mobile Communications, Inc., Tele-Link Communications, WCTV Partners, Washington Communications, Wayne Partners, and Zarg Corporation (collectively, "Joint Petitioners") filed a "Petition for Reconsideration and Request for Stay," which was supplemented on January 16, 1996, to indicate service on additional parties. Also, on January 16, 1996, Dunbar Television Corporation, KMC Interactive TV, Inc., Loli, Inc., and Whitehall Wireless Corporation (collectively, "Dunbar et al.") filed a "Petition for Reconsideration and Clarification." No oppositions were filed. 3. The parties request reconsideration of five issues. First, Joint Petitioners request that: (1) the bidding credit in a service area where the original beneficiary of such bidding credit has defaulted be transferred to the winning bidder for the other license in the service area; (2) the installment payment period be extended to seven years; (3) eligibility for any reauction of defaulted licenses be restricted to those that registered for the July 28-29, 1994, auction and did not win licenses, and those that won licenses at that auction and subsequently submitted the requisite down payments and license applications; and (4) we determine whether a licensee may participate in a reauction to "switch" the license it holds in its service area for the other license in that service area. Second, CTI requests that we defer resolution of the issue of eligibility restrictions for a reauction of defaulted IVDS licenses until our reconsideration of the Fourth Report and Order in the competitive bidding proceeding. Finally, Dunbar et al. request that we reconsider our decision not to revise the installment payment program to permit annual rather than quarterly installment payments. III. DISCUSSION A. Transfer of Bidding Credits 4. In the July 28-29, 1994, IVDS auction, we provided a 25 percent "bidding credit" for companies owned by minorities and/or women, to help ensure their opportunity to participate in the auctions process and the provision of IVDS offerings. We limited use of the bidding credit, however, so that it would be available for the license on frequency segment A or B, but not on both segments. Consequently, the highest bidder in each service area was permitted to choose its frequency segment and take the bidding credit, if eligible. If the second highest bidder was also eligible for a bidding credit, then that second highest bidder was given the option of accepting the remaining license without the credit or declining the license for the remaining frequency segment. Following the auction, some winning bidders who had been awarded bidding credits defaulted on their licenses. As a result, the bidding credits for these service areas remain unused. In the Order, we denied requests to transfer these bidding credits to remaining eligible winning bidders, stating that these remaining licensees were awarded precisely what they had bid on and that fairness did not require that they receive additional, post-auction benefits as a result of the actions of defaulting bidders. 5. Joint Petitioners argue on reconsideration that we would advance our policy of encouraging minority and women participation in the IVDS industry by transferring the bidding credits, and that these transfers would not, therefore, merely result in a "windfall" to the recipients. We disagree. As we noted in the Order, the petitioners had no reasonable expectation that they would ultimately receive a bidding credit. In fact, these petitioners and similarly situated licensees were afforded the opportunity to accept or decline their license after the highest bidder had selected its license and took advantage of the bidding credit. Significantly, when presented with this choice, the petitioners affirmatively elected to accept the license at their outstanding bid and without benefit of a bidding credit. Consequently, to grant the relief requested by petitioners would indeed result in a windfall to them because they would be placed in a better position at this subsequent date despite their earlier informed decisions to forgo the advantage associated with using bidding credits. As we previously indicated, we do not believe that the actions of some defaulting bidders justify modifying the payment terms of non-defaulting bidders. With respect to petitioners' suggestion that grant of their requested relief would encourage minority and female participation in the IVDS industry, we note that it is true that a reduction in any licensee's total bid amount will help that licensee meet its payment obligations. We do not, however, believe that this argues in favor of granting the additional, post-auction benefit requested. B. Installment Payment Plan 1. Duration of Payment Plan 6. In the Order, we addressed a variety of requests to defer or reduce IVDS auction payments. We denied the requests, noting that our intent has been to permit the marketplace to determine the value of auctioned licenses. Joint Petitioners reiterate their request that the Commission extend the overall installment payment period from five years to seven years. In support, they argue that (1) analyses of predicted and actual winning bid amounts demonstrate that certain winning bidders that later defaulted drove up bid amounts at auction to "grossly inflated" levels, (2) the actions of the defaulters were not reasonably foreseeable, and the oral outcry auction methodology left no time for "reasonable [bid] evaluation[s]," (3) the defaults have left gaps in coverage and disrupted plans for networking among systems, (4) the equipment market has not developed quickly enough, and (5) sources of financing have not materialized because of the state of the IVDS industry. 7. We find that Joint Petitioners' arguments do not support the requested revisions in the installment payment program. Again, we believe that bidders must use due diligence prior to auction and then, knowing their own financial limits and pre-auction license valuations, bid (or not bid) accordingly. We believe this is a reasonable and rational approach regardless of the particular auction methodology employed. We affirm that the actions of defaulters is not a valid argument for extending the payments of those who now believe that they bid too high. In addition, we note that licensing of any new service includes inherent uncertainties about the development of the service. In this connection, we consider equipment roll-out timetables, successful or unsuccessful start-ups, and gaps in service area coverage to be post-auction events that, even if unanticipated, generally do not constitute sufficient grounds for revising licensee payment obligations. We therefore deny Joint Petitioners' request. 2. Frequency of Installment Payments 8. IVDS licensees eligible to pay for their licenses through installments can make interest-only payments during the first two years of their installment payment plan. Dunbar et al. request that they be permitted to pay the first two years of installment payments on an annual basis. In addressing this issue in the Order we described how, following Administrative Procedure Act (APA) "notice and comment" procedures, we adopted Section 1.2110(e)(3) of our rules. Section 1.2110(e)(3) states that "[u]pon grant of the license, the Commission will notify each eligible licensee of the terms of its installment payment plan," and continues that Such plans will: (i) impose interest based on the rate of U.S. Treasury obligations (with maturities closest to the duration of the license term) at the time of licensing; (ii) allow installment payments for the full license term; (iii) begin with interest-only payments for the first two years; and (iv) amortize principal and interest over the remaining term of the license. Following the grant of licenses, we promptly notified licensees, both by Public Notice and by materials sent directly to them, of the terms of the IVDS installment payment program, including a five-year schedule of quarterly payments. In the Order we concluded, [a]uction participants had adequate notice that additional details of the installment payment program would be forthcoming after the auction was completed and the licenses granted. The repayment schedule established by the Office of Managing Director is consistent with generally accepted lending practices. Licensees were notified of the details of the installment payment program promptly after the grant of their licenses, consistent with procedures specified in the rule. We disagree that, because the above payment rule states that interest-only payments are due "for the first two years," it was reasonable for bidders to infer that "installments" meant "annual installments." Nor do we think that this argument is bolstered by the fact that the IVDS rules contain one-year, three-year, and five-year construction "build-out" requirements. We believe that petitioners could not reasonably have been misled on this point. Finally, we addressed the argument that the alleged current state of the IVDS financial and equipment markets makes it difficult to raise capital or earn revenue, and that it is therefore in the public interest to permit annual installment payments. We indicated that if petitioners believed that they required additional financial assistance, the proper recourse would be to file a "grace period" request under the rules. 9. Dunbar et al. argue that the plain language of the rule -- that the installment payment program "will . . . begin with interest-only payments for the first two years" -- supports an interpretation that only annual installment payments are required. Dunbar et al. note that, for a different radio service recently subject to auctions, the requirement of paying quarterly was specifically incorporated into the pertinent rule. Dunbar et al. state that the quarterly payment requirement should have been placed in the rules governing IVDS, to comport with the APA. Finally, Dunbar et al. contend that the quarterly payment requirement contravenes Congressional intent that the Commission be sensitive to the special difficulties faced by small businesses in obtaining financing. 10. We disagree with Dunbar et al.'s position. We affirm our determination that the language in Section 1.2110(e)(3) could not reasonably be interpreted or read to support an expectation that only annual installment payments would be required. Rather, we find that the plain language of the rule, "[u]pon grant of the license, the Commission will notify each eligible licensee of the terms of its installment payment plan," includes as a "term" the specification of frequency of payment. Dunbar et al.'s interpretation of Section 1.2110(e)(3) uses one sentence out of context with the rest. Section 1.2110(e)(3) states that payment programs will allow installment payments "over the full license term," with interest-only payments "over the first two years" and combined interest and principal payments "over the remaining term" of the license. When these sentences are read together, it is apparent that "over the first two years" refers to a two-year period of time, and not the frequency of payments. We also note that the Second Report and Order in the competitive bidding proceeding, which accompanied the implementation of Section 1.2110(e)(3), discussed the few specifications listed in Section 1.2110(e)(3) and stated that "[f]urther details" would be established later. Thus, when Section 1.2110(e)(3) was adopted, it was anticipated that "further details" of the installment payment program, such as the frequency of payments, would not be specified in the rule. 11. We also affirm that the choice of quarterly payments was consistent with generally accepted lending practices, and we reject Dunbar et al.'s argument that the determination of the frequency of payments, simply by its importance, was required to be established by rule. This result is not altered by the fact that we changed our approach in the context of a more recent auction. Finally, we do not agree that requiring quarterly payments contravened Congressional intent. In implementing our competitive bidding program, we have attempted to be sensitive to the concerns of small businesses through special provisions such as installment payment programs and bidding credits. We do not believe, however, that our support of this goal requires that we alter reasonable terms of an installment payment program. C. Bidder Eligibility for Reauctioning of Defaulted Licenses 12. In the Order, we denied requests that, in any re-auction of defaulted licenses, the universe of eligible bidders be limited to two categories of entities: those that registered for the July 28-29, 1994, auction and did not win licenses, and those that won licenses at that auction and subsequently submitted the requisite down payments and license applications. We noted in the Order that including new applicants in a re-auction of defaulted licenses helps ensure a competitive auction, and reiterated the importance of attracting as many qualified bidders as possible to any reauction. Joint Petitioners argue that limiting the reauction would be administratively more convenient for the Commission, fairer for the previous non-defaulting participants, and would help prevent "more abuse" of the auctions process. We affirm our previous decision. We believe that during the time between the original auction and the default, circumstances may have changed so significantly as to alter the value of the license(s) to auction participants as well as to parties who did not participate. Fairness does not require that only previous participants be permitted into the re-auction, and such an approach may compromise our ultimate goal of ensuring that licenses are awarded to those who value them most highly. We will continue to deter insincere bidding through the use of upfront payments and bid withdrawal and default remedies, and we retain our discretion to prohibit defaulters from participating in future auctions in instances where we find gross misconduct, misrepresentation, or bad faith. In addition, CTI requested that this issue be deferred until our reconsideration of the Fourth Report and Order in the competitive bidding docket. In support of its position, CTI cited two issues addressed in that reconsideration: bidding on other licenses in one's service area and increasing the pre-auction upfront payment. The resolution of these other issues, however, raised the possibility that we might amend our rules, while the resolution of the present issue did not. Furthermore, we recently adopted the subject reconsideration order. Thus, CTI's request is now moot. D. Bidding on Other License in Service Area 13. In the Order, we raised the issue of whether an IVDS licensee may participate in the reauction of defaulted licenses and win the license for the other frequency segment in its service area. We noted that, under the Commission's Rules, an IVDS license holder may not hold another IVDS license, or an interest in such license, in its service area, yet the licensee might wish to "switch" licenses through the auction process, if permitted. We stated that we intended to address this possibility separately, in our reconsideration of the Fourth Report and Order in the auctions proceeding. Joint Petitioners state, without further discussion, that this issue should be addressed here. 14. We have now adopted the subject reconsideration order and have addressed this issue. In the Sixth Memorandum Opinion and Order and Further Notice of Proposed Rule Making, we state that a licensee may file, as an attachment to its pre-auction short-form application, a request for waiver of the common ownership rule. If the licensee is granted the waiver and wins the second license, the licensee must divest itself of the first license within 90 days of the grant of the second, and is responsible for all penalty or other amounts that result from these transactions. IV. ORDERING CLAUSE 15. Accordingly, IT IS ORDERED that, pursuant to the authority of Sections 4(i), 303(r), and 309(j) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 303(r), and 309(j), this Memorandum Opinion and Order IS ADOPTED. IT IS FURTHER ORDERED that the petitions for reconsideration filed by the Joint Petitioners and Dunbar et al. ARE DENIED. IT IS FURTHER ORDERED that the petition for reconsideration filed by Community Teleplay, Inc., IS DISMISSED AS MOOT. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary