Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) Requests for Waiver of Section 101.1003(a) ) of the Commission's Rules Establishing ) Eligibility Restrictions on Incumbent ) LECs and Cable Operators in the ) Local Multipoint Distribution Service ) ORDER Adopted: September 23, 1998 Released: September 23, 1998 By the Chief, Auctions & Industry Analysis Division, and the Chief, Public Safety & Private Wireless Division: 1. The Auctions & Industry Analysis Division and Public Safety & Private Wireless Division ("Divisions") have before them ten requests for waiver of the Commission's rule imposing eligibility restrictions on incumbent local exchange carriers ("LECs") and incumbent cable operators that seek to acquire Local Multipoint Distribution Service ("LMDS") A block licenses in their current service areas. Because these requests address the same issue, we have opted to resolve these matters in one Order. For the reasons discussed below, we grant these licenses subject to all applicable conditions set forth in the Commission's rules and a companion Public Notice also being released today, and deny the waiver requests. Since we are conditionally granting these licenses, we also dismiss as moot a Petition to Deny filed by Brownwood Television Cable Service, Inc. against Central Texas Telephone Investment's license application. 2. Background. Pursuant to Section 101.1003 of the Commission's rules, an incumbent LEC or incumbent cable operator is prohibited from owning an attributable interest in an LMDS A block license if the LMDS license's geographic service area significantly overlaps the incumbent's authorized or franchised service area. A "significant overlap" of an incumbent's authorized or franchised service area occurs when at least 10 percent of the population of the LMDS licensed service area, as determined by 1990 census figures for the counties contained in that service area, is within the incumbent's authorized or franchised service area. A winning bidder of an A block license that is subject to this rule must partition and divest either the portion of its authorized or franchised service area that exceeds the overlap restriction, or the portion of its LMDS service area that exceeds the overlap restriction. The divestiture must occur within 90 days of the final grant of the license, which is contingent upon the licensee's compliance with the rule. If a licensee is unable to find a buyer in the required period of time, divestiture may be made to an interim trustee provided the licensee has no interest in or control of the trustee and the trustee may dispose of the divested portion of the license as it sees fit. 3. Section 101.1003 was adopted to foster competition in the local telephone and multichannel video distribution ("MVPD") markets. In the LMDS Second Report and Order, the Commission found that although there are several potential and actual sources of competition to incumbent LECs and cable operators in their respective markets, none of these technologies has yet posed a significant competitive antidote to the incumbents' market power. Because of its significant capacity and potential to supply a wide range of one- and two-way services, including video, voice and data, the Commission concluded that the LMDS service provides a significant opportunity to increase competition in these markets. The Commission further recognized, however, that an in-region LMDS license would be particularly valuable to incumbent LECs and cable operators as it would allow them not only to provide increased or additional services, but also to preserve excess profits that an independent LMDS competitor could erode. 4. After reviewing the extensive record compiled in the LMDS proceeding, the Commission decided to restrict temporarily incumbent LECs and cable operators from obtaining full ownership of LMDS A block licenses that significantly overlapped with their service areas. As the Commission explained, this approach would allow incumbent LECs and cable operators to participate in the LMDS auction and provide LMDS service, but also would ensure the entry of new LMDS operators that could provide competition. The restriction would apply for a three-year period, but could be extended if necessary to further promote competition in the local exchange and MVPD markets. However, the Commission also recognized that during the restriction period, some incumbent LECs and cable operators might be able to show that conditions in a particular market were sufficiently competitive to eliminate the restriction. The Commission thus provided that subsequent to the initial grant of LMDS licenses, an incumbent LEC or cable operator could obtain a waiver of the eligibility restriction upon showing that the petitioner no longer had market power in its authorized or franchised service area due to the entry of a new competitor, other than an LMDS licensee, into such service area. 5. Several rural telephone company bidders for A block licenses filed requests for waiver of the eligibility restriction at the time they filed applications to participate in the LMDS auction. At that time, an appeal of the eligibility restriction as applied to rural telcos was pending in the U.S. District Court of Appeals for the D.C. Circuit, and petitions for reconsideration of various provisions of the LMDS Second Report and Order, including the eligibility restriction as applied to rural telcos, were pending before the Commission. On February 6, 1998, the court upheld the eligibility restriction generally and as applied to rural telephone companies. On February 11, 1998, the Commission denied petitions for reconsideration of the eligibility restriction. The LMDS auction commenced on February 18, 1998 and closed on March 25, 1998. Winning bidders were required to file long-form applications by April 9, 1998. Winning bidders for A block licenses that had filed waiver requests with their short-form applications repeated their requests in their long-form applications, and other winning bidders also filed requests for waiver of the eligibility restriction at that time. In addition, CTC, Craw-Kan, and Northwest filed waiver requests as minor modifications to their long-form applications. Some petitioners argued that they met the waiver criteria established under Sections 101.23 and 101.1003(a)(2) of the Commission's Rules. Other petitioners did not cite to either of these waiver rules, but based their waiver requests on factors similar to the criteria established in Sections 101.23 and 1.3 of the Commission's Rules. 6. In a Public Notice released on April 16, 1998, the Wireless Telecommunications Bureau ("Bureau") sought comment on a March 26, 1998 letter from the United States Telephone Association ("USTA") to Chairman Kennard urging the Commission to eliminate eligibility restrictions for reauctioned licenses and all ownership restrictions on previously auctioned licenses. The Bureau also sought comment on all aspects of the instant waiver requests. The Bureau received 12 comments and 8 reply comments in response to the Waiver Public Notice. In addition, Brownwood Television Cable Service, Inc. filed a Petition to Deny CTTI's license application solely on the basis that CTTI's waiver request should be denied. Many commenters mostly rural telephone cooperatives that had filed waiver requests and rural telco interest groups support a waiver of the eligibility restriction for all rural telephone companies that were winning bidders of A block licenses. One commenter supports the eligibility restriction but argues that small business LMDS licensees should be allowed to sell all or part of their licenses to incumbent LECs or cable operators. In contrast, two commenters oppose any waivers of the rule, and two commenters oppose grant of a waiver on any grounds except Section 101.1003(a)(2), which, they argue, is not available to the instant petitioners at this time. Finally, SCCTA and Time Warner Cable specifically oppose the grant of Farmers' and Horry's waiver requests, and Duckhorn, Falcon, and Brownwood oppose the grant of CTTI's waiver request. 7. Discussion. Section 101.23 requires waiver requests to demonstrate either "that the underlying purpose of the rule will not be served or will be frustrated by its application in a particular case, and that grant of the waiver is otherwise in the public interest; or that the unique facts and circumstances of a particular case render application of the rule inequitable, unduly burdensome, or otherwise contrary to the public interest and an applicant has shown the lack of a reasonable alternative." As discussed in greater detail below, the Divisions find that petitioners have failed to meet either of the showings required for grant of a waiver. Moreover, any assertions made pursuant to Section 101.1003(a)(2) are inapplicable. As noted above, Section 101.1003(a)(2) provides that subsequent to the initial grant of LMDS licenses, an incumbent LEC or cable operator may obtain a waiver of the eligibility restriction upon showing that the petitioner no longer has market power in its authorized or franchised service area due to the entry of a new competitor, other than an LMDS licensee, into such service area. However, the Commission has clearly stated that a waiver pursuant to this section is available only to entities seeking to obtain LMDS licenses through assignments or transfers of control, and is not available in the case of the initial award of licenses through the auction process. We therefore reject assertions by Time Warner, Falcon, SCCTA, and Brownwood that the waiver requests should be dismissed as premature under Section 101.1003(a)(2). If, as these commenters argue, we were limited to applying Section 101.1003(a)(2), the restrictive language contained therein might require such a result. However, we are not so restricted, since petitioners may seek rule waivers at any time under the general Part 101 waiver provision. Therefore, we evaluate each waiver request according to the criteria set forth in Section 101.23. 8. The following table summarizes pertinent facts underlying the waiver requests: Summary of Petitioners' Waiver Requests Petitioner A Block License Won Population Overlap Claimed (%) Petitioner Holds B Block license? Other Bidders for A Block License? CTTI Brownwood, TX 15.64 Yes Yes CTC Dickinson, ND N/A No Yes Craw-Kan Pittsburgh-Parsons, KS 17.23 No Yes Farmers Sumter, SC 66 No Yes GW Wireless Rapid City, SD 18 No Yes Horry Myrtle Beach, SC 68 Yes Yes Northern Bemidji, MN 17.87 Yes Yes Northwest Williston, ND 29 No Yes Venture Venture Aberdeen, SD Huron, SD 32 18 No No Yes Yes 9. Petitioners argue that, for a variety of reasons, their status as rural telephone companies justifies grant of their petitions for waiver. Contrary to petitioners' arguments, their status as rural telcos does not demonstrate how application of the eligibility restriction will not serve or will frustrate its underlying purpose, or why grant of a waiver is otherwise in the public interest. Several petitioners argue that any restrictions on their ability to utilize "alternative technologies" to deliver services to their subscriber-members "would result in a disservice to the public and undermine the policy goals of the rule itself." Others assert that application of the rule conflicts with the Commission's statutory mandate to promote the delivery of advanced telecommunications services to rural America, and that denying their waiver requests is inconsistent with Section 309(j)(3)(A) of the Communications Act. RTG and RTFC support this position, arguing that only rural LECs, and especially member-owned cooperatives, have the incentive to extend LMDS service to rural America. 10. The Commission considered such issues when it adopted the eligibility restriction at issue in these waiver petitions. Section 309(j) of the Communications Act contains several objectives that guide the Commission in auctioning spectrum for new services. These objectives include both the promotion of competition and the dissemination of licenses to rural telephone companies. However, as the Commission explained in the LMDS Second Report and Order and the LMDS Third Order on Reconsideration, the Commission's primary objective in the LMDS proceeding was to encourage competition in the telephony and MVPD markets. Thus, the Commission determined that a policy favoring restricted eligibility for a limited time would result in the greatest likelihood of increased competition in the local telephone and MVPD markets. Since the Commission concluded that the record did not indicate any basis to find that rural LECs would not have the same opportunities and incentives for anticompetitive use of LMDS licenses as other incumbent LECs, these entities were not exempted from the restriction. However, the Commission also concluded that the rule as crafted would not hinder the introduction of LMDS in rural areas. This finding was specifically upheld by the court in Melcher, which stated that "the FCC's imposition of the three-year eligibility restriction on rural LECs is fully consistent with a reasonable interpretation of section 309(j), and the Commission has clearly explained its basis for concluding that this eligibility restriction will foster competition." Finally, with regard to CTTI, Horry, and Northern, we note that these parties can use their B Block licenses to provide services throughout their BTAs. 11. Similarly, petitioners' status as rural telephone companies, or, more specifically, rural telephone cooperatives, does not demonstrate unique facts that render the eligibility restriction inequitable, unduly burdensome, or otherwise contrary to the public interest. In addition, petitioners have failed to demonstrate the lack of a reasonable alternative. Craw-Kan, CTTI, and Northern claim that because they are subscriber-owned cooperatives, "it will be difficult to choose which subscribers will get the services and which subscribers will not." Similarly, Venture and GW Wireless argue that because their parent companies provide phone service to only the rural portions of the subject BTAs, compliance with the rule will require that these companies divest their LMDS licenses over either a significant portion of their wireline service areas, or the more densely populated, "cost-effective" areas of their respective LMDS BTAs. Finally, Farmers, Horry, CTC, and Northwest contend that it would be inequitable and unduly burdensome to exclude them from access to efficient technological methods of delivering telecommunications services to their rural customers. 12. As discussed above, Petitioners' status as rural telephone companies or cooperatives alone does not advance their cases for waivers. Many such entities provide service to regions throughout the country, and the Commission was not unaware of this fact when it included these entities within the scope of the eligibility restriction. Venture, GW Wireless, CTC, Farmers, Horry, and Northwest have offered no additional information to demonstrate why application of the rule would be unduly burdensome or inequitable in its particular case as required under Section 101.23. This information would be especially significant given the extent of the population overlap in most of the subject BTAs, and particularly in the case of Horry, which holds the B Block license in the Myrtle Beach BTA. We also note that these six petitioners have entered into or are in the process of negotiating partitioning arrangements among themselves or with other entities, which prevents them from arguing the lack of a reasonable alternative to a waiver. We are pleased that several parties are negotiating with other rural telephone companies, thereby furthering the policy objectives of the eligibility restriction. 13. CTTI, Northern, and Craw-Kan also argue that denial of a waiver would be inequitable because the divested overlap area in each BTA would unfairly lose the benefit of the competition that their LMDS service would bring. They claim that divestiture is not a reasonable alternative because no other entities are interested in providing LMDS service to their BTAs, which are "not very desirable." For example, Craw-Kan and Northern point to the fact that only one other bidder bid on each of their licenses, and that they won their licenses relatively early in the auction, to show that there was a lack of interest in their BTAs. 14. These assertions are unsupported by the record. We agree with Falcon that we should not evaluate a waiver request by speculating as to why entities or individuals did not participate in the LMDS auction or why they did or did not bid on particular licenses. The fact that only one other bidder sought the A block license is not dispositive of whether other entities would be interested in serving this area via a partitioning or disaggregation arrangement. Both Craw-Kan and Northern have indicated that several other independent rural telephone companies serve the subject BTAs. Although these entities may not have chosen to participate in the auction, they are precisely the type of entities that the Commission sought to aid in adopting partitioning and disaggregation rules for the LMDS service, and many have expressed an interest in pursuing such arrangements. Therefore, we reject Northern's claim that denial of its waiver request will result in a forfeiture of its license and the denial of service to the BTA. With regard to Craw-Kan, this argument also overlooks the possibility that the divested area may receive LMDS service from Liberty Cellular, the B Block license holder in the subject BTA. 15. With regard to CTTI, we note that another bidder continued to place bids for the Brownwood BTA A Block license through round 117 (the auction closed in round 128). In addition, CTTI revealed on its Form 601 that prior to filing its short-form application, it participated in preliminary discussions regarding partitioning with Leaco Rural Telephone Cooperative. Although CTTI also indicated that it did not appear that the parties would enter a formal partitioning agreement, these discussions, along with the demonstrated competition for the license, undermine CTTI's argument that it is the only entity willing to provide LMDS service to the Brownwood BTA. Furthermore, the Commission's rules provide that if licensees are unable to secure a buyer within the 90-day period provided for divestiture, they may divest to an interim trustee, provided the licensee has no interest in or control of the trustee and the trustee may dispose of the license as it sees fit. 16. In the event their waiver requests are denied, Venture and GW Wireless request that they be permitted to either: 1) return their licenses without paying a "difference payment" or other penalty, or 2) divest themselves of all or part of the licenses within 90 days of the final grant of the licenses. Venture and GW Wireless further argue that "the imposition of penalties or default payments on such entities would be grossly unfair, especially since these entities are owned by the very subscribers desiring such service, and would inhibit the provision of advanced telecommunications services to the rural citizens served by telephone cooperatives." 17. Again, neither party has offered a reason other than its rural telephone cooperative status to support its request for preferential treatment under the Commission's rules. In addition, contrary to both parties' assertions, Section 101.1003(f)(4) does not permit licensees to divest their entire licenses as a means of complying with the eligibility restriction; rather, the rule explicitly states that divestiture is limited to the options provided under Section 101.1003(f)(1). With regard to the request for a waiver of penalties, we note that GW Wireless and Venture can avoid the imposition of any penalties by complying with the divestiture requirement within ninety days of this Order. We further note, however, that absent extraordinary circumstances, a waiver of the penalty provisions set forth under Section 101.1003(f)(6) would undermine the integrity of the auctions process. All parties were aware of the eligibility restriction when they decided to participate in the auction, and, as mentioned above, the D.C. Circuit Court of Appeals upheld the eligibility restriction both generally and as applied to rural telephone companies prior to the commencement of the auction. Similarly, the Commission adopted the penalties for failing to comply with the divestiture requirement almost one year prior to the commencement of the LMDS auction. Specifically, the rule provides that a winning bidder's failure to comply with the divestiture requirement within the applicable time frame will be treated as a material bad faith misrepresentation, and that the penalty for such misrepresentation includes forfeiting the full winning bid amount(s), as well as any other monies paid the Commission, and any other action the Commission deems appropriate based on the facts presented in each case. Moreover, the Commission clarified this rule prior to the commencement of the auction in the LMDS Third Order on Reconsideration. For these reasons, we deny these requests, but we emphasize that GW Wireless and Venture can avoid these penalties by complying with the divestiture requirement within ninety days of the date of this Order. 18. Finally, we emphasize that by requiring these entities to divest a geographic portion of their service areas, we hope to create additional opportunities for other rural telephone companies to enter the LMDS market. As the court in Melcher noted, our partitioning rules are intended to help small businesses by making ownership of an LMDS service more affordable, because such entities do not have to garner sufficient capital to purchase and effectively utilize an entire LMDS license. In fact, the Commission specifically considered the potential benefits to rural telephone companies in adopting the partitioning and disaggregation rules, and commenters have revealed that many rural telcos are interested in pursuing this option. Thus, requiring petitioners to eliminate the population overlap between their telephone and LMDS service areas by partitioning the overlap area will create increased opportunities for rural telcos and other small businesses. Indeed, the record in this proceeding indicates that this is already happening. Therefore, we are confident that requiring these divestitures will not limit the availability or quality of LMDS services to rural areas. ORDERING CLAUSES 19. For the reasons set forth above, IT IS ORDERED that the requests for waiver of Section 101.1003(a) filed by Central Texas Telephone Investments, Inc; Consolidated Telephone Cooperative; Craw-Kan Telephone Cooperative, Inc.; Farmers Telephone Cooperative, Inc.; GW Wireless, Inc.; Horry Telephone Cooperative, Inc.; Northern Communications, Inc.; Northwest Communications Cooperative, and Venture Wireless, Inc. ARE HEREBY DENIED. 20. IT IS FURTHER ORDERED that Brownwood Television Cable Service, Inc.'s Petition to Deny Central Texas Telephone Investments, Inc.'s license application IS HEREBY DISMISSED as moot. 21. IT IS FURTHER ORDERED that the 10 above-referenced license applications of Central Texas Telephone Investments, Inc; Consolidated Telephone Cooperative; Craw-Kan Telephone Cooperative, Inc.; Farmers Telephone Cooperative, Inc.; GW Wireless, Inc.; Horry Telephone Cooperative, Inc.; Northern Communications, Inc.; Northwest Communications Cooperative, and Venture Wireless, Inc. ARE HEREBY CONDITIONALLY GRANTED subject to the conditions and procedures set forth in Section 101.1003 of the Commission's rules and the companion Public Notice released today. 22. These actions are taken pursuant to delegated authority as set forth in 47 U.S.C.  155(c) and 47 C.F.R.  0.331. FEDERAL COMMUNICATIONS COMMISSION Amy J. Zoslov Chief, Auctions & Industry Analysis Division Wireless Telecommunications Bureau D'wana R. Terry Chief, Public Safety & Private Wireless Division Wireless Telecommunications Bureau APPENDIX Parties Filing Comments BellSouth Corporation ("BellSouth") Brownwood Television Cable Service, Inc. ("Brownwood") (Petition to Deny and Comments) Duckhorn Broadcasting, Inc. ("Duckhorn") Golden West Telecommunications Cooperative, Inc. ("Golden West") Kingdon R. Hughes National Telephone Cooperative Association ("NTCA") Rural Telecommunications Group ("RTG") Rural Telephone Finance Cooperative ("RTFC") South Carolina Cable Television Association ("SCCTA") Time Warner Cable ("Time Warner") US West Communications, Inc. Venture Wireless, Inc. ("Venture") Parties Filing Reply Comments Central Texas Telephone Investments, Inc. ("CTTI") Falcon Telecable ("Falcon") Farmers Telephone Cooperative, Inc. ("Farmers") Horry Telephone Cooperative, Inc. ("Horry") Golden West Telecommunications Cooperative, Inc. Northern Communications, Inc. ("Northern") United States Telephone Association ("USTA") Venture Wireless, Inc.