Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. In the Matter of ) ) Rulemaking to Amend Parts 1, 2, 21, and 25 ) CC Docket No. 92-297 Of the Commission's Rules to Redesignate ) The 27.5-29.5 GHz Frequency Band, To ) Reallocate the 29.5-30.0 GHz Frequency ) Band, To Establish Rules and Policies for ) Local Multipoint Distribution Service ) And for Fixed Satellite Services ) ) Petitions for Reconsideration of ) the Commission's Competitive Bidding Rules ) SECOND ORDER ON RECONSIDERATION Adopted: September 9, 1997 Released: September 12, 1997 By the Commission: Commissioner Chong issuing a statement in which Commissioner Quello joins. I. Introduction and Executive Summary 1. The Commission has before it several petitions for reconsideration of the Second Report and Order, Order on Reconsideration, and Fifth Notice of Proposed Rulemaking in this proceeding. This Second Order on Reconsideration addresses those portions of the aforementioned petitions -- those of CellularVision, WebCel, and Cook Inlet -- that deal with the participation of small businesses in the upcoming auction of Local Multipoint Distribution Service ("LMDS") licenses. For the reasons set forth below, we reconsider and modify certain rules affecting small business participation in the LMDS license auction. Specifically, we:  Eliminate installment payments for LMDS licensees in favor of revised, tiered bidding credits for very small, small, and entrepreneurial businesses participating in this auction;  Deny a request to adopt an "asset test" for evaluating business size; and  Decline to further address the qualifications of licensees that are delinquent or in default on FCC licenses in other services for obtaining favorable provisions for this auction. Those portions of the aforementioned petitions that do not deal with the small business participation rules will be addressed in a separate Commission ruling. II. Background 2. In the LMDS Second Report and Order, we adopted service and competitive bidding rules for LMDS which included, inter alia, provisions designed to assist two distinct sizes of small businesses and entities. Entities with average gross revenues for the preceding three years of more than $40 million but not more than $75 million hereinafter are referred to as "entrepreneurs." A small business is defined as "an entity that, together with its affiliates and controlling principals, has average gross revenues for the three preceding years of not more than $40 million." For entrepreneurs, we made available 15 percent bidding credits and installment payments at the same interest rate as for small businesses. Installment payments for entrepreneurs consist of both interest and principal amortized over the ten years of the license term. Small businesses are eligible for 25 percent bidding credits and installment payments, the interest rate for which is based on the rate for ten-year U.S. Treasury obligations, fixed at the time of licensing, plus 2.5 percent. Installment payments for small businesses consist of interest-only payments for the first two years, and interest and principal amortized over the remaining eight years of the license term. 3. CellularVision, WebCel, and Cook Inlet request that the Commission reconsider certain aspects of the small business provisions established in the LMDS Second Report and Order. Zip Communications Corporation ("Zip"), RTG, and CellularVision filed oppositions to various portions of these petitions. WebCel and CellularVision also replied to some of the oppositions. Finally, the Commission received ex parte communications from the National Venture Capital Association ("NVCA"), U.S. WaveLink Telecommunications Group, L.P. ("U.S. WaveLink"), WebCel, CellularVision, and LBC. Petitions for judicial stay of the LMDS Second Report and Order have also been filed. III. Discussion 1. Commencement of the Auction 4. Petitions. U.S. WaveLink urges the Commission to announce that the LMDS auction will begin no later than November, 1997, believing expedition imperative to ensure sound business planning. U.S. WaveLink asserts that the LMDS auction is already long overdue, that capital markets have been poised to invest, and that further delay will dampen investors' interest, slow the delivery of innovative video programming and telecommunications services to the public, and irreparably harm competition in LMDS and in the video programming and telecommunications markets in which LMDS licensees seek to compete. Zip also urges the Commission to commence the LMDS auction as expeditiously as possible. 5. Discussion. We agree with U.S. WaveLink and Zip regarding the need to move expeditiously to auction the LMDS licenses. We believe that the public will significantly benefit from the availability of new services via LMDS and from the benefits of competition between LMDS and established services. We are concerned that further delay may slow the delivery of new services to the public and harm the growth of competition. We also want to give sufficient time from the date of the release of this Second Order on Reconsideration for potential bidders to arrange financing. Therefore, we have recently announced that the LMDS auction will begin on December 10, 1997. This issue is therefore moot. 2. Installment Payments 6. Petitions. Cook Inlet urges us to eliminate the installment payment plans for LMDS licensees. Cook Inlet asserts that installment payment plans fueled speculation in the broadband Personal Communications Services ("PCS") auctions, encouraged expectations of Commission relief from payment obligations, and saddled the Commission with difficult credit-related tasks for which it has no experience. Cook Inlet further argues that installment payment programs force the Commission to balance its duty to regulate the provision of wireless services with its sometimes conflicting obligation to manage the federal debt responsibly. To ensure that small businesses have the opportunity to compete for LMDS licenses, Cook Inlet urges the Commission to offer increased bidding credits in place of installment payment plans, which it asserts will allow responsible small bidders with appropriately tailored business plans to secure private financing, without sacrificing market driven bidding discipline. 7. CellularVision, WebCel, Zip and LBC oppose Cook Inlet's proposal to eliminate installment payment plans for LMDS licensees. CellularVision and WebCel argue that Section 309(j)(4) of the Communications Act requires the Commission to consider the use of installment payments as a means of ensuring that licenses are held by a wide variety of applicants, including small businesses. WebCel further argues that installment payments were successful in past auctions, and that in this proceeding the Commission lacks the requisite degree of justification to eliminate them. CellularVision, WebCel and LBC also express doubts that private financing will be available or sufficient for participation in the LMDS auction and subsequent build-out, marketing and operations. Zip agrees with Cook Inlet that its proposal would curb speculative bidding, but also believes that it would eliminate any meaningful opportunity for small businesses to participate in the LMDS auction. If the Commission does eliminate installment payments for LMDS licensees, CellularVision proposes that small businesses, as currently defined, receive a 50 percent bidding credit in order to attract the necessary private financing to compete in the LMDS auction. 8. Contrary to Cook Inlet's proposal, CellularVision asserts that an additional, "deferred incremental repayment" installment payment option, that takes into account the special resource-intensive characteristics of LMDS, is necessary to ensure maximum small business participation in the LMDS auction. WebCel, for its part, suggests the creation of two additional "very small" business categories (see  14, infra) which would include proportionally favorable installment payment plans. Zip opposes CellularVision's proposal, asserting that the elimination of any immediate financial obligation would give bidders an incentive to engage in speculation, and that it may encourage bidders to drive prices beyond the range of small businesses, with the expectation that the Commission will forgive the winners' debt obligations if they later find that they have overreached. CellularVision asserts in reply that the auction process itself virtually eliminates the possibility of speculation. 9. Discussion. We grant Cook Inlet's petition and eliminate installment payment plans for LMDS licensees. Notwithstanding the arguments of CellularVision and WebCel, Congress did not require the use of installment payments in all auctions, but rather recognized them as one means of promoting the objectives of Section 309(j)(3) of the Communications Act. The Commission continues to experiment with different means for achieving its obligations under the statute, and has offered installment payments to licensees in several auctioned wireless services. By no means, however, has Congress dictated that installment payments are the only tool in assisting small business. Indeed, we have conducted several auctions without installment payments. Moreover, in recent legislation, Congress dictated that certain future auctions effectively be conducted without installment payments. We have carefully considered the use of installment payment plans for LMDS licensees. We conclude that we can meet our statutory obligations absent these provisions. 10. The Commission must balance competing objectives in Section 309(j) that require, inter alia, that it promote the development and rapid deployment of new spectrum-based services and ensure that designated entities are given the opportunity to participate in the provision of such services. In assessing the public interest, we must try to ensure that all the objectives of Section 309(j) are considered. While we disagree with Cook Inlet's contention that installment payments necessarily encourage speculation, our experience with the installment payment program leads us to conclude that installment payments may not always serve the public interest. The Commission has found, for example, that obligating licensees to pay for their licenses as a condition of receipt requires greater financial accountability from applicants. We are presently examining issues relating to our administration of installment payments, including those raised by Cook Inlet, in several other proceedings. Because of the importance of these issues, we plan to incorporate our decisions regarding installment payments for the broadband PCS C and F Blocks and other financial issues into our Part 1 rulemaking. Nevertheless, we agree with U.S. WaveLink and Zip about the need to move expeditiously to auction the LMDS licenses. We believe that the public interest is best served by going forward with the LMDS auction without extending installment payments to LMDS licensees. In place of installment payments, we establish other changes that will provide for the interests of new entrants (see  16-17 and 19-20, infra). 11. We disagree with the contentions of WebCel, LBC, and Zip that installment payments are necessary to ensure a meaningful opportunity for small businesses to participate in LMDS. In other auctions in which installment payments were not available, small businesses were the high bidders on a significant number of licenses. In the WCS auction, which had bidding credits of 25 percent for small businesses and 35 percent for very small businesses and no installment payments, 25 percent of the licenses went to small or very small businesses. In the cellular auction of licenses for unserved areas, which had no special bidding provisions, 36 percent of the licenses went to small or very small businesses. CellularVision, although expressing some doubts regarding the ability of small businesses to attract private financing, suggests that a large enough bidding credit would enable small businesses to do so, while Cook Inlet contends that increased bidding credits will allow responsible small bidders with appropriately tailored business plans to secure private financing. WebCel, Cook Inlet, and NVCA also point out, as discussed below, that LMDS may be built out incrementally, which may allow for lower levels of front-end system financing than other services. Further, as we have already noted, Section 309(j) requires the Commission to consider alternative methods to allow for dissemination of licenses among designated entities, including small businesses. We believe that the methods discussed below will both fulfill the mandate of Section 309(j) to provide small business with the opportunity to participate in auctions and ensure that new services are offered to the public without delay. 12. Since we have decided not to offer installment payments, we reject as moot both CellularVision's proposed deferred incremental repayment and WebCel's suggestion of a favorable interest rate for very small businesses. We further disagree with WebCel that the Commission lacks adequate justification to eliminate installment payment plans for LMDS licensees under the Administrative Procedures Act and Motor Vehicle Manufacturers. Section 706(2)(A) of the Administrative Procedures Act states that agency actions, findings, and conclusions shall be held unlawful and set aside if they are found to be "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law . . . ." Motor Vehicle Manufacturers held that this standard is applicable to rescission or modification of rules. Under Motor Vehicle Manufacturers and other cases, an agency acts arbitrarily or capriciously if it fails to examine the relevant data and articulate a satisfactory explanation for its action including a "rational connection between the facts found and the choices made." We have fully considered the issue based on our experience with installment payment plans and the record before us in this proceeding. 3. Very Small Business Category 13. Petitions. In place of the current installment payment plan, Cook Inlet requests the institution of a "very small business" category, featuring a 35 percent bidding credit, for entities that, together with affiliates and controlling principals, have average gross revenues for the preceding three years of not more than $15 million. Cook Inlet opines that while substantial capital will be necessary to acquire and construct LMDS systems, LMDS may provide better opportunities for smaller entities than did broadband PCS because LMDS operators will be able to build out systems incrementally without compromising their provision of service to end users. Cook Inlet notes the examples of wireless local loop or video offerings, in which "a smaller system may stand on its own on a more localized basis without the need for immediate 'total area' coverage or even national systems support." 14. NVCA and WebCel also advocate very small business categories, although not in place of installment payments, arguing that the fixed nature of LMDS service allows cell sites and network infrastructure to be deployed incrementally to match revenue generation. Therefore, the initial capital-raising requirements for one or a few markets are not as formidable as services that require extensive buildout before they are put into service. NVCA also asserts that because the fixed nature of LMDS obviates the need for nationwide roaming and national branding, very small businesses can be successful with only one or a few licenses. Both NVCA and WebCel express concern that without a very small business category, entrepreneurial entities with differentiated business plans and adequate venture financing, who would otherwise succeed in building local LMDS businesses, will be outbid by much larger entities that currently qualify for the same provisions. WebCel consequently requests the adoption of a very small business category for entities with average gross revenues for the three preceding years of not more than $15 million, and an additional very small business category for entities with average gross revenues for the three preceding years of not more than $3 million, and seeks advantageous installment payment rates and bidding credits for these categories. RTG concurs with parties advocating inclusion of a very small business category in the LMDS auction, asserting that LMDS is capital-intensive and that small businesses will not be able to afford licenses or effectively deploy their systems without additional incentives. 15. CellularVision opposes implementation of WebCel's plan if it would reduce current incentives for small businesses or entrepreneurs, believing that any incentives granted for very small businesses must be in addition to the current bidding credits and installment payment plans for those entities. Zip also opposes WebCel's proposal for a very small business category, without elaboration. 16. Discussion. We will create an additional category to benefit "very small" businesses bidding for LMDS licenses, along the lines suggested by Cook Inlet, NVCA, WebCel, and RTG. We agree that a unique category for very small businesses will serve as an effective method of leveling the competitive imbalance between very small businesses and other entrepreneurial entities. We will define "very small" businesses as entities that, together with controlling principals and affiliates, have average gross revenues for the three preceding years of not more than $15 million. We will also re-define "small" businesses as entities that, together with controlling principals and affiliates, have average gross revenues for the three preceding years of more than $15 million but not more than $40 million. These categories are identical to those adopted for the broadband PCS F Block auction, as petitioners argue. We will apply to the very small business category the same attribution, control, consortia, upfront payment, and unjust enrichment rules that we adopted for our small business and entrepreneur categories. 17. We decline to adopt WebCel's suggestion of another category for entities that, together with controlling principals and affiliates, have average gross revenues for the three preceding years of not more than $3 million. Under the revised "tiered" approach, we will have three categories of bidders: "entrepreneurs," "small businesses," and "very small businesses." Creating an additional category (i.e., "very, very small" businesses) adds another layer of complexity with little countervailing benefit to bidders. We believe that the three categories will adequately serve to diversify opportunity in our LMDS auction. 4. Bidding Credits 18. Petitions. As previously described, Cook Inlet supports heightened bidding credits in lieu of installment payment plans for LMDS licenses. Specifically, Cook Inlet suggests the establishment of the aforementioned very small business category with a 35 percent bidding credit, and the retention of a 25 percent bidding credit for small businesses and a 15 percent bidding credit for entrepreneurs. Cook Inlet asserts that "increased bidding credits such as these" are appropriate in the absence of installment payment plans. To the extent that installment payments are no longer available for LMDS licensees, CellularVision proposes a 50 percent bidding credit for small businesses, as currently defined, in order to attract the necessary private financing to compete in the LMDS auction. WebCel requests that the Commission offer either a bidding credit of 35 percent for its two very small business categories, or adopt the tiered scheme employed for the broadband PCS F Block auction -- a 25 percent bidding credit for very small businesses, a 15 percent bidding credit for small businesses, and no bidding credit for entrepreneurs. 19. Discussion. We will offer higher bidding credits than those adopted in the LMDS Second Report and Order for small businesses and entrepreneurs. We agree with Cook Inlet and CellularVision that heightened bidding credits are appropriate in the absence of installment payment plans. Also, contrary to WebCel's assertions, we believe that heightened bidding credits will fulfill the mandate of Section 309(j)(4)(D) of the Communications Act to provide small businesses with the opportunity to participate in spectrum-based services. As noted above, this approach was successful in enabling small businesses to participate in the WCS auction, in which we were unable to employ installment payments because of the statutory deadline for depositing auction revenues in the U.S. Treasury. We also recently used this approach in establishing rules for the auction of licenses for 800 MHz SMR. However, we do not agree with the bidding credit levels suggested by the petitioners. Except for entities that would qualify as very small businesses, Cook Inlet's proposed levels would not account for the loss of installment payment plans. WebCel's alternative suggestion of conforming the LMDS bidding credit levels to those employed in the broadband PCS F Block auction would entail reducing the bidding credits available to small businesses and entrepreneurs at the same time that we are eliminating installment payments. CellularVision has not provided any support for its assertion that small businesses will require a 50 percent bidding credit to attract private financing. 20. We will raise the bidding credit available to small businesses (entities with average gross revenues for the three preceding years of more than $15 million but not more than $40 million) to 35 percent and the bidding credit available to entrepreneurs (entities with average gross revenues for the preceding three years of more than $40 million but not more than $75 million) to 25 percent. These levels reflect the thresholds adopted in the LMDS Second Report and Order, with a reasonable adjustment of ten percent for the unavailability of installment payment plans for LMDS licensees. In addition, we will adopt a 45 percent bidding credit for very small businesses (entities with average gross revenues for the three preceding years of not more than $15 million) in the LMDS auction. This level reflects the 35 percent threshold requested by WebCel, plus a reasonable adjustment for the lack of bidding credits. We note that it is difficult to accurately calculate the net present value of an installment payment plan (which value would depend on several variables, including future commercial interest rates), and we do not in any event commit to an exact accommodation or reimbursement of the value of installment payments. Nor do we intend to exactly match our small business provisions for LMDS to those employed in other services such as WCS or 800 MHz SMR. Our small business provisions for LMDS have historically deviated from those adopted for other services, and we believe that an effort to conform them to the provisions adopted for other types of wireless services would be pointless. 5. Asset Test 21. Petitions. WebCel, Zip, and NVCA suggest the institution of an asset test in our small business size standards to differentiate start-ups from larger entities. WebCel's suggested asset test would consist of a "financial eligibility threshold" excluding firms with total assets in excess of $500 million, the measure of which would include the value of other licenses held. Zip suggests financial eligibility thresholds of $250 million for small businesses, and $500 million for entrepreneurs. NVCA would have us apply the $500 million threshold employed in other auctions. 22. Discussion. We will not adopt an asset test for the LMDS auction. Although we have adopted an asset test for eligibility for particular blocks of licenses in broadband PCS auctions, we have never before employed an asset test for eligibility for small business size standards. We also note that the Small Business Administration, the rules of which have formed the basis for much of our own consideration of small business provisions, presently does not employ asset tests in its business size standards except in the context of national and commercial banks, savings institutions, and credit unions. Assets, being potentially fluid and subject to inconsistent valuation (e.g., intangibles) are generally much less ascertainable than gross revenues or numbers of employees. We further note that we have never counted licenses won in other auctions as assets for purposes of calculating total assets, as requested by WebCel, and there would appear to be significant questions of proper valuation (e.g., amortization schedules) in doing so. Given the complexity and significance of the issues associated with asset tests and the importance of proceeding with the LMDS auction without further delay (see  10, supra), we do not feel that we have enough data at this time to do adopt an asset test for LMDS. However, we will consider adopting an asset test in future auctions in our Part 1 rulemaking. 6. Exclusion of Delinquent and Defaulted Debtors 23. Petitions. Cook Inlet suggests that licensees that are delinquent or in default on their installment payment obligations in other services should be ineligible for special bidding provisions in LMDS. Cook Inlet considers this particularly appropriate if installment payment plans are not offered, believing that a bidder that is prepared to pay in full should be required to dedicate those funds to the satisfaction of an existing Commission obligation before acquiring new licenses. Cook Inlet asserts that "bidders should not expect that delinquency or default exists as a money management system in one auction without consequence in another." Cook Inlet accordingly suggests that the Commission require entities that are seeking favorable provisions in the LMDS auction to certify on their short-form applications (FCC Form 175) that neither they nor their affiliates or attributable investors are delinquent or in default on any Commission competitive bidding installment payment obligation. 24. Discussion. We decline to further address the qualifications of licensees that are delinquent or in default on other FCC licenses for obtaining favorable provisions for the LMDS auction. We agree with Cook Inlet that, as a matter of policy, it may be desirable to exclude licensees that have defaulted on existing obligations from further favorable small business provisions. However, we have already amended Section 1.2105(a) of our Part 1 Rules to indicate that "an applicant's signature on FCC Form 175 or its electronic submission of this form will serve to certify that the applicant is not in default on any payment for Commission licenses (including down payments) and that it is not delinquent on any non-tax debt owed to any federal agency." Moreover, Section 1.2105(a)(2)(v) of our Part 1 Rules requires a certification that the applicant is legally, technically, financially and otherwise qualified to bid. We therefore believe that our existing rules address this issue. IV. Ordering Clauses 25. ACCORDINGLY, IT IS ORDERED that the Petition for Partial Reconsideration filed by WebCel Communications, Inc., is granted in part and denied in part; the Petition for Reconsideration filed by Cook Inlet Region, Inc., is granted in part and denied in part; and the Petition for Partial Reconsideration filed by CellularVision USA, Inc., is granted in part and denied in part. 26. IT IS FURTHER ORDERED that Part 101 of the Commission's Rules is amended as set forth in the attached Appendix A. 27. IT IS FURTHER ORDERED that the rule changes made herein WILL BECOME EFFECTIVE 60 days after their publication in the Federal Register. This action is taken pursuant to Section 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). 28. IT IS FURTHER ORDERED that the Commission SHALL SEND a copy of this Second Order on Reconsideration, including the Supplemental Final Regulatory Flexibility Analysis set forth in the attached Appendix B, to the Chief Counsel for Advocacy of the Small Business Administration. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary APPENDIX A Final Rules Part 101 of title 47 of the Code of Federal Regulations is amended as follows: 1. The authority citation continues to read as follows: AUTHORITY: 47 U.S.C. Sections 154, 303. 2. Section 101.1105 is revised to read as follows:  101.1105 Submission of payments. (a) Each applicant to participate in an LMDS auction will be required to submit an upfront payment in accordance with Sec. 1.2106 of this chapter as announced by the Wireless Telecommunications Bureau by Public Notice. (b) Winning bidders in LMDS auctions must submit a down payment to the Commission in an amount sufficient to bring their total deposits up to 20 percent of their winning bids within ten business days following the release of a Public Notice announcing the close of the auction. Winning bidders must pay the full balance of their winning bids within ten business days following the release of a Public Notice that the Commission is prepared to award the licenses. 3. Section 101.1107 is revised to read as follows:  101.1107 Bidding credits for very small businesses, small businesses and entrepreneurs; unjust enrichment. (a) A winning bidder that qualifies as a very small business or a consortium of very small businesses pursuant to Sec. 101.1112 may use a bidding credit of 45 percent to lower the cost of its winning bid. (b) A winning bidder that qualifies as a small business or a consortium of small businesses pursuant to Sec. 101.1112 may use a bidding credit of 35 percent to lower the cost of its winning bid. (c) A winning bidder that qualifies as an entrepreneur or a consortium of entrepreneurs pursuant to Sec. 101.1112 may use a bidding credit of 25 percent to lower the cost of its winning bid. (d) The bidding credits referenced in paragraphs (a), (b) and (c) of this section are not cumulative. (e) Unjust enrichment. (1) A licensee that utilizes a bidding credit, and that during the initial license term seeks to assign or transfer control of a license to an entity that does not meet the eligibility criteria for a bidding credit, will be required to reimburse the U.S. Government for the amount of the bidding credit, plus interest based on the rate for ten year U.S. Treasury obligations applicable on the date the license is granted, as a condition of Commission approval of the assignment or transfer. If, within the initial term of the license, a licensee that utilizes a bidding credit seeks to assign or transfer control of a license to an entity that is eligible for a lower bidding credit, the difference between the bidding credit obtained by the assigning party and the bidding credit for which the acquiring party would qualify, plus interest based on the rate for ten year U.S. Treasury obligations applicable on the date the license is granted, must be paid to the U.S. Government as a condition of Commission approval of the assignment or transfer. If, within the initial license term, a licensee that utilizes a bidding credit seeks to make any ownership change that would result in the licensee losing eligibility for a bidding credit (or qualifying for a lower bidding credit), the amount of the bidding credit (or the difference between the bidding credit originally obtained and the bidding credit for which the restructured licensee would qualify), plus interest based on the rate for ten year U.S. Treasury obligations applicable on the date the license is granted, must be paid to the U.S. Government as a condition of Commission approval of the ownership change. (2) The amount of payments made pursuant to paragraph (e)(1) of this section will be reduced over time as follows: (i) A transfer in the first two years of the license term will result in a forfeiture of 100 percent of the value of the bidding credit (or the difference between the bidding credit obtained by the original licensee and the bidding credit for which the post-transfer licensee is eligible); (ii) In year three of the license term the payment will be 75 percent; (iii) In year four of the license term the payment will be 50 percent; and (iv) In year five of the license term the payment will be 25 percent, after which there will be no required payment. 4. Section 101.1108 is removed and reserved. 5. Section 101.1109 is revised to read as follows:  101.1109 Certifications, disclosures, records maintenance and audits. (a) Short-form applications: certifications and disclosure. In addition to certifications and disclosures required in part 1, subpart Q, of this chapter, each applicant for an LMDS license which qualifies as a very small business, small business or entrepreneurs pursuant to Sec. 101.1112 shall append the following information as an exhibit to its short-form applications (FCC Form 175): (1) The identities of the applicant's affiliates and controlling principals; and (2) The applicant's gross revenues, computed in accordance with Sec. 101.1112. (b) Long-form applications: certifications and disclosure. In addition to the requirements in Sec. 1.2107 of this chapter, each applicant submitting a long-form application for an LMDS license and qualifying as a very small business, small business or entrepreneur pursuant to Sec. 101.1112 shall, in an exhibit to its long-form application: (1) Disclose separately and in the aggregate the gross revenues, computed in accordance with Sec. 101.1112, for each of the following: the applicant, the applicant's affiliates, the applicant's controlling principals, and, if a consortium of very small businesses, small businesses or entrepreneurs, the members of the consortium; (2) List and summarize all agreements or other instruments (with appropriate references to specific provisions in the text of such agreements and instruments) that support the applicant's eligibility as a very small business, small business or entrepreneur, including the establishment of de facto and de jure control; such agreements and instruments include, but are not limited to, articles of incorporation and bylaws, shareholder agreements, voting or other trust agreements, franchise agreements, and any other relevant agreements including letters of intent, oral or written; and (3) List and summarize any investor protection agreements, including rights of first refusal, supermajority clauses, options, veto rights, and rights to hire and fire employees and to appoint members to boards of directors or management committees. (c) Records maintenance. All winning bidders qualifying as very small businesses, small businesses or entrepreneurs shall maintain at their principal place of business an updated file of ownership, revenue, and asset information, including any document necessary to establish eligibility as a very small business, small business or entrepreneur. Licensees (and their successors-in-interest) shall maintain such files for the term of the license. Applicants that do not obtain the license(s) for which they applied shall maintain such files until the grant of such license(s) is final, or one year from the date of the filing of their short-form application (FCC Form 175), whichever is earlier. (d) Audits. (1) Applicants and licensees claiming eligibility as a very small business, small business or entrepreneur pursuant to Sec. 101.1112 shall be subject to audits by the Commission. Selection for audit may be random, on information, or on the basis of other factors. (2) Consent to such audits is part of the certification included in the short-form application (FCC Form 175). Such consent shall include consent to the audit of the applicant's or licensee's books, documents and other material (including accounting procedures and practices) regardless of form or type, sufficient to confirm that such applicant's or licensee's representations are, and remain, accurate. Such consent shall include inspection at all reasonable times of the facilities, or parts thereof, engaged in providing and transacting business, or keeping records regarding licensed LMDS service, and shall also include consent to the interview of principals, employees, customers and suppliers of the applicant or licensee. 6. Section 101.1112 is revised to read as follows:  101.1112 Definitions. (a) Scope. The definitions in this section apply to Secs. 101.1101 through 101.1112, unless otherwise specified in those sections. (b) Very small business. A very small business is an entity that, together with its affiliates and controlling principals, has average gross revenues for the three preceding years of not more than $15 million. (c) Small business. A small business is an entity that, together with its affiliates and controlling principals, has average gross revenues for the three preceding years of more than $15 million but not more than $40 million. (d) Entrepreneur. An entrepreneur is an entity that, together with its affiliates and controlling principals, has average gross revenues for the three preceding years of more than $40 million but not more than $75 million. (e) For purposes of determining whether an entity meets the definition of very small business, small business or entrepreneur, the gross revenues of the applicant, its affiliates and controlling principals shall be considered on a cumulative basis and aggregated. (f) Consortium. A consortium of very small businesses, small businesses or entrepreneurs is a conglomerate organization formed as a joint venture between or among mutually independent business firms, each of which individually satisfies the definition of a very small business, small business or entrepreneur. Each individual member must establish its eligibility as a very small business, small business or entrepreneur. Where an applicant (or licensee) is a consortium of very small businesses, small businesses or entrepreneurs, the gross revenues of each business shall not be aggregated. (g) Gross revenues. Gross revenues shall mean all income received by an entity, whether earned or passive, before any deductions are made for costs of doing business (e.g., cost of goods sold), as evidenced by audited financial statements for the relevant number of most recently completed calendar years, or, if audited financial statements were not prepared on a calendar-year basis, for the most recently completed fiscal years preceding the filing of the applicant's short-form application (FCC Form 175). If an entity was not in existence for all or part of the relevant period, gross revenues shall be evidenced by the audited financial statements of the entity's predecessor-in-interest or, if there is no identifiable predecessor- in-interest, unaudited financial statements certified by the applicant as accurate. When an applicant does not otherwise use audited financial statements, its gross revenues may be certified by its chief financial officer or its equivalent. (h) Affiliate. (1) Basis for affiliation. An individual or entity is an affiliate of an applicant if such individual or entity: (i) Directly or indirectly controls or has the power to control the applicant; (ii) Is directly or indirectly controlled by the applicant; (iii) Is directly or indirectly controlled by a third party or parties who also control or have the power to control the applicant; or (iv) Has an "identity of interest" with the applicant. (2) Nature of control in determining affiliation. (i) Every business concern is considered to have one or more parties who directly or indirectly control or have the power to control it. Control may be affirmative or negative and it is immaterial whether it is exercised so long as the power to control exists. Example for paragraph (h)(2)(i). An applicant owning 50 percent of the voting stock of another concern would have negative power to control such concern since such party can block any action of the other stockholders. Also, the bylaws of a corporation may permit a stockholder with less than 50 percent of the voting stock to block any actions taken by the other stockholders in the other entity. Affiliation exists when the applicant has the power to control a concern while at the same time another person, or persons, are in control of the concern at the will of the party or parties with the power of control. (ii) Control can arise through stock ownership; occupancy of director, officer, or key employee positions; contractual or other business relations; or combinations of these and other factors. A key employee is an employee who, because of her position in the concern, has a critical influence in or substantive control over the operations or management of the concern. (iii) Control can arise through management positions if the voting stock is so widely distributed that no effective control can be established. Example for paragraph (h)(2)(iii). In a corporation where the officers and directors own various size blocks of stock totaling 40 percent of the corporation's voting stock, but no officer or director has a block sufficient to give him control or the power to control and the remaining 60 percent is widely distributed with no individual stockholder having a stock interest greater than 10 percent, management has the power to control. If persons with such management control of the other entity are controlling principals of the applicant, the other entity will be deemed an affiliate of the applicant. (3) Identity of interest between and among persons. Affiliation can arise between or among two or more persons with an identity of interest, such as members of the same family or persons with common investments. In determining if the applicant controls or is controlled by a concern, persons with an identity of interest will be treated as though they were one person. (i) Spousal affiliation. Both spouses are deemed to own or control or have the power to control interests owned or controlled by either of them, unless they are subject to a legal separation recognized by a court of competent jurisdiction in the United States. (ii) Kinship affiliation. Immediate family members will be presumed to own or control or have the power to control interests owned or controlled by other immediate family members. In this context "immediate family member" means father, mother, husband, wife, son, daughter, brother, sister, father- or mother-in-law, son- or daughter-in-law, brother- or sister-in-law, step-father or -mother, step-brother or -sister, step-son or -daughter, and half- brother or -sister. This presumption may be rebutted by showing that: (A) The family members are estranged; (B) The family ties are remote; or (C) The family members are not closely involved with each other in business matters. Example for paragraph (h)(3)(ii). A owns a controlling interest in Corporation X. A's sister-in-law, B, has a controlling interest in an LMDS license application. Because A and B have a presumptive kinship affiliation, A's interest in Corporation X is attributable to B, and thus to the applicant, unless B rebuts the presumption with the necessary showing. (4) Affiliation through stock ownership. (i) An applicant is presumed to control or have the power to control a concern if she owns or controls or has the power to control 50 percent or more of its voting stock. (ii) An applicant is presumed to control or have the power to control a concern even though he owns, controls, or has the power to control less than 50 percent of the concern's voting stock, if the block of stock she owns, controls, or has the power to control is large as compared with any other outstanding block of stock. (iii) If two or more persons each owns, controls or has the power to control less than 50 percent of the voting stock of a concern, such minority holdings are equal or approximately equal in size, and the aggregate of these minority holdings is large as compared with any other stock holding, the presumption arises that each one of these persons individually controls or has the power to control the concern; however, such presumption may be rebutted by a showing that such control or power to control, in fact, does not exist. (5) Affiliation arising under stock options, convertible debentures, and agreements to merge. Stock options, convertible debentures, and agreements to merge (including agreements in principle) are generally considered to have a present effect on the power to control the concern. Therefore, in making a size determination, such options, debentures, and agreements will generally be treated as though the rights held thereunder had been exercised. However, neither an affiliate nor an applicant can use such options and debentures to appear to terminate its control over another concern before it actually does so. Example 1 for paragraph (h)(5). If company B holds an option to purchase a controlling interest in company A, which holds a controlling interest in an LMDS applicant, the situation is treated as though company B had exercised its rights and had become owner of a controlling interest in company A. The gross revenues of company B must be taken into account in determining the size of the applicant. Example 2 for paragraph (h)(5). If a large company, BigCo, holds 70 percent (70 of 100 outstanding shares) of the voting stock of company A, who holds a controlling interest in an LMDS license applicant, and gives a third party, SmallCo, an option to purchase 50 of the 70 shares owned by BigCo, BigCo will be deemed to be an affiliate of company A, and thus the applicant, until SmallCo actually exercises its options to purchase such shares. In order to prevent BigCo from circumventing the intent of the rule, which requires such options to be considered on a fully diluted basis, the option is not considered to have present effect in this case. Example 3 for paragraph (h)(5). If company A has entered into an agreement to merge with company B in the future, the situation is treated as though the merger has taken place. (6) Affiliation under voting trusts. (i) Stock interests held in trust shall be deemed controlled by any person who holds or shares the power to vote such stock, to any person who has the sole power to sell such stock, and to any person who has the right to revoke the trust at will or to replace the trustee at will. (ii) If a trustee has a familial, personal or extra-trust business relationship to the grantor or the beneficiary, the stock interests held in trust will be deemed controlled by the grantor or beneficiary, as appropriate. (iii) If the primary purpose of a voting trust, or similar agreement, is to separate voting power from beneficial ownership of voting stock for the purpose of shifting control of or the power to control a concern in order that such concern or another concern may meet the Commission's size standards, such voting trust shall not be considered valid for this purpose regardless of whether it is or is not recognized within the appropriate jurisdiction. (7) Affiliation through common management. Affiliation generally arises where officers, directors, or key employees serve as the majority or otherwise as the controlling element of the board of directors or the management (or both) of another entity. (8) Affiliation through common facilities. Affiliation generally arises where one concern shares office space, employees, or other facilities (or any combination of the foregoing) with another concern, particularly where such concerns are in the same or related industry or field of operations, or where such concerns were formerly affiliated, and through these sharing arrangements one concern has control, or potential control, of the other concern. (9) Affiliation through contractual relationships. Affiliation generally arises where one concern is dependent upon another concern for contracts and business to such a degree that one concern has control, or potential control, (10) Affiliation under joint venture arrangements. A joint venture for size determination purposes is an association of concerns or individuals (or both), with interests in any degree or proportion, formed by contract, express or implied, to engage in and carry out a single, specific business venture for joint profit for which purpose they combine their efforts, property, money, skill and knowledge, but not on a continuing or permanent basis for conducting business generally. The determination whether an entity is a joint venture is based upon the facts of the business operation, regardless of how the business operation may be designated by the parties involved. An agreement to share profits/losses proportionate to each party's contribution to the business operation is a significant factor in determining whether the business operation is a joint venture. (11) Exclusion from affiliation coverage. For purposes of this section, Indian tribes or Alaska Regional or Village Corporations organized pursuant to the Alaska Native Claims Settlement Act (43 U.S.C. 1601 et seq.), or entities owned and controlled by such tribes or corporations, are not considered affiliates of an applicant (or licensee) that is owned and controlled by such tribes, corporations or entities, and that otherwise complies with the requirements of this section, except that gross revenues derived from gaming activities conducted by affiliated entities pursuant to the Indian Gaming Regulatory Act (25 U.S.C. 2701 et seq.) will be counted in determining such applicant's (or licensee's) compliance with the financial requirements of this section, unless such applicant establishes that it will not receive a substantial unfair competitive advantage because significant legal constraints restrict the applicant's ability to access such gross revenues. APPENDIX B Supplemental Final Regulatory Flexibility Analysis As required by the Regulatory Flexibility Act, 5 U.S.C.  603 ("RFA"), a Final Regu- latory Flexibility Analysis ("FRFA") was incorporated in Appendix D of the LMDS Second Report and Order in this proceeding. The Commission's Supplemental Final Regulatory Flexibility Analysis ("SFRFA") in this Second Order on Reconsideration reflects revised or additional information to that contained in the FRFA, and incorporates the FRFA by reference. The SFRFA is thus limited to matters raised in petitions for reconsideration of the LMDS Second Report and Order and addressed in the Second Order on Reconsideration. This SFRFA conforms to the RFA, as amended by the Contract with America Advancement Act of 1996 ("CWAAA"), P.L. 104-121, 110 Stat. 846 (1996). I. Need For, and Objectives of, the Second Order on Reconsideration This Second Order on Reconsideration is issued in response to certain petitions for reconsideration of the LMDS Second Report and Order. The revisions in our rules made in the Second Order on Reconsideration are intended to address concerns raised in the record concerning the competitive bidding rules for LMDS, while otherwise reaffirming the Commission's commitment to the rapid implementation of LMDS throughout the United States. II. Summary of Significant Issues Raised by the Public Comments in Response to the Final Regulatory Flexibility Statement No comments were received in direct response to the FRFA, but the Second Order on Reconsideration addresses three petitions for reconsideration of the LMDS Second Report and Order that raise issues affecting small businesses. One petitioner asks that the Commission reconsider its rules making installment payments available to small business LMDS licensees and replace the installment payment plans with heightened bidding credits. Contrary to that request, another petitioner requests that the Commission augment its LMDS installment payment plan with an additional "deferred incremental repayment" installment payment option delaying payment of principal until late in the license term. One petitioner supporting retention of installment payments alternatively suggests that the Commission adopt higher bidding credits if installment payments are eliminated. Two petitioners ask that the Commission reconsider its rules defining small business size categories and that it consider establishing a additional categories for very small businesses, with heightened bidding credits and/or more favorable installment payment terms. One of those petitioners also requests that the Commission adopt an asset test to distinguish between the various existing and proposed small business size categories. Finally, one petitioner asks that the Commission hold licensees that are delinquent or in default on their installment payment obligations in other services ineligible for special bidding preferences in LMDS. Oppositions, replies to oppositions, and ex parte comments were filed in response to the petitions and were considered before a decision was reached. III. Description and Estimate of the Number of Small Entities to Which Rules Will Apply As in the FRFA, the service regulations we adopt to implement LMDS would apply to all entities seeking an LMDS license. As discussed in the FRFA, using the Small Business Administration ("SBA") definitions applicable to radiotelephone companies and to cable and pay television services, the majority of LMDS entities to provide video distribution and telecommunications services may be small businesses. The Commission had not developed a more refined definition of small entities applicable to LMDS prior to the LMDS Second Report and Order because LMDS is a new service. The RFA amendments were not in effect until shortly before the Fourth NPRM in this proceeding was released, and no data has been received establishing the number of small businesses associated with LMDS. However, in the Third NPRM in this proceeding we proposed to auction the spectrum for assignment and requested information regarding the potential number of small businesses interested in obtaining LMDS spectrum, in order to determine their eligibility for special provisions such as bidding credits and installment payments to facilitate participation of small entities in the auction process. In the LMDS Second Report and Order we adopted criteria for defining small businesses for purposes of determining such eligibility. We will use this definition for estimating the potential number of entities applying for auctionable spectrum that are small businesses. In Section II.D.2.e. of the LMDS Second Report and Order we adopted criteria for defining small businesses and other eligible entities for purposes of defining eligibility for bidding credits and installment payments. We defined a small business as an entity that, together with affiliates and controlling principals, has average gross revenues not exceeding $40 million for the three preceding years. Additionally, bidding credits and installment payments were made available to applicants that, together with affiliates and controlling principals, have average gross revenues for the three preceding years of more than $40 million but not more than $75 million ("entrepreneurs"). In the Second Order on Reconsideration we adopt a "very small business" category. A very small business is defined as an entity that, together with controlling principals and affiliates, has average annual gross revenues for the three preceding years of not more than $15 million. These entities were previously included within the small business definition. No parties submitting or commenting on the petitions giving rise to the Second Order on Reconsideration commented on the potential number of entities that would be very small businesses, and we are unable to predict accurately the number of applicants for LMDS that would fit the definition of a small business or very small business for competitive bidding purposes. However, in the FRFA, we estimated the number of applicants that are small businesses based on the rules for the Multipoint Distribution Service ("MDS"), which use the same size standard as was adopted for LMDS. A total of 154 applications were received in the MDS auction, of which 141, or 92 percent, qualified as small businesses. MDS rules did not provide a very small business definition. We note, however, that in the broadband PCS F Block rules, we adopted a very small business definition like the one adopted for LMDS. In the broadband PCS F Block auction, 53.9 percent of the applicants were very small businesses. We plan to issue two licenses for each of the 492 BTAs, excluding New York, that are the geographic basis for licensing LMDS. Thus, 984 licenses will be made available for authorization in the LMDS auction. Inasmuch as 92 percent of the applications received in the MDS auction were from entities qualifying as small businesses, we anticipate receiving at least the same proportion of applications from small business entities seeking LMDS licenses. Further, as many as 53.9 percent of these entities could be very small businesses. IV. Description of Projected Reporting, Recordkeeping, and Other Compliance Requirements These descriptions will remain unchanged, for purposes of this Second Order on Reconsideration, from those in the FRFA. V. Steps Taken to Minimize Significant Economic Impact on Small Entities, and Significant Alternatives Considered While installment payment plans for small entities in LMDS are eliminated in the Second Order on Reconsideration, the Commission found that better alternatives to assist small businesses, as well as ensure provision of new services to the public, are to raise bidding credits for existing categories of small entities and adopt an additional category for very small businesses. The Commission agrees with the suggestions of two petitioners that bidding credits of sufficient size will enable small businesses to secure private financing. This suggestion is consistent with the Commission's experience in other auctions in which installment payments were not offered and small entities nevertheless have been successful (e.g., the auction of Wireless Communications Service licenses, for which bidding credits were heightened to accommodate the lack of installment payments). Prior to the Second Order on Reconsideration, bidding credits of 15 percent were offered to entrepreneurs, and 25 percent to small businesses. The Commission now offers bidding credits of 25 percent for entrepreneurs, 35 percent for small businesses, and 45 percent for very small businesses. Additionally, the adoption of a category for very small businesses, featuring a bidding credit higher than those offered to small businesses and entrepreneurs, will serve as an effective method of leveling the competitive imbalance between those entities, as well as allowing very small businesses to compete more effectively with large entities. Since the Commission decided not to offer installment payments in LMDS, it rejected as moot both the suggestion of a deferred incremental repayment option and the suggestion of a favorable interest rate for very small businesses. The Commission disagreed with the assertion that small businesses would require a 50 percent bidding credit to attract private financing in the absence of installment payments. This assertion is unsupported and is at odds with the levels suggested by another petitioner as being sufficient to attract private financing without installment payments. The levels of bidding credits adopted offer a reasonable accommodation for the elimination of installment payments and constitute a reasonable compromise between the levels suggested in lieu thereof. Also, although adopting the suggestion of an additional category for very small businesses, the Commission rejected the suggestion of a second additional category for entities that, together with controlling principals and affiliates, have average annual gross revenues for the three preceding years of not more than $3 million. This suggestion, which was part of an ex parte comment and not significantly elucidated, would create, in essence, a "very, very small business" category that would add another layer of complexity with little apparent countervailing benefit to bidders. The Commission also declined to adopt an asset test to distinguish between the small business size categories. Assets, being potentially fluid and subject to inconsistent valuation, are generally less ascertainable than gross revenues or numbers of employees. Although the Commission has adopted an asset test for eligibility for particular blocks of licenses in broadband PCS auctions, it has never employed an asset test in its small business size standards. Nor does the SBA employ an asset test in its business size standards, except in the context of national and commercial banks, savings institutions, and credit unions (for which asset reporting obligations exist for other regulatory purposes). Finally, the Commission declined to further address the qualifications of licensees that are delinquent or in default on FCC licenses in other services for obtaining favorable provisions for the LMDS auction. While the Commission agrees that, as a matter of policy, it may be desirable to exclude licensees that have defaulted on existing obligations form further small business provisions, its existing rules already address this issue. An applicant's signature on FCC Form 175 or its electronic submission of that form serves to certify that the applicant is not in default on any payment for Commission licenses (including down payments), that it is not delinquent on any non-tax debt owed to any federal agency, and that it legally, technically, financially and otherwise qualified to bid. VI. Report to Congress The Commission will enclose a copy of the Second Order on Reconsideration, including this SFRFA, in a report to be sent to Congress pursuant to the Small Business Regulatory Enforcement Fairness Act of 1996. A copy of the Second Order on Reconsideration and this SFRFA (or summary thereof) will also be published in the Federal Register and will be sent to the Chief Counsel for Advocacy of the SBA. Separate Statement of Commissioner Rachelle B. Chong, in which Commissioner James H. Quello Joins Re: Rulemaking to Amend Parts 1, 2, 21, and 25 of the Commission's Rules to Redesignate the 27.5-29.5 GHz Frequency Band, to Establish Rules and Policies for Local Distribution Service and for Fixed Satellite Services, CC Docket No. 92-297, Second Order on Reconsideration It is with some concern that I cast my vote to eliminate installment payments for the LMDS auction. I supported this decision because I share my colleagues' concerns about the difficulties associated with the Commission's administration of the installment payment program, and I strongly felt that we should not delay the LMDS auctions while we worked through these larger issues. I am concerned, however, that the timing of our decision may have a regrettable negative impact on the ability of small businesses and woman and minority-owned businesses to participate in the LMDS auction. The decision we issue today comes just ninety days before the start of the LMDS auction. By now, the potential bidders in the LMDS auction have prepared their business plans and have secured their financial support to participate in the auction. The bidders who are small businesses and who relied on the availability of installment payments will now be forced to make last minute significant adjustments to their plans. That being said, given the Commission's recent experiences with the installment payment program, I agree with my colleagues that we could not go forward with another auction that included installment payments without careful consideration of all of the ramifications of that decision. Unfortunately, there was no way to do that without delaying the LMDS auction -- something I simply was not willing to do given the long and arduous road we have travelled to get to this auction. I am anxious to get LMDS up and running to provide new and vigorous competition to incumbent multichannel video providers and data providers. In the last three-and-a-half years, many small businesses have emphasized to me how important installment payments are to them, due to the "access to capital" problem small businesses face in the real world. They argue that bidding credits are not a perfect substitute for installment payments. I recognize the validity of this argument, but I must balance this against the Commission's deep concern about our installment payment programs. I am hopeful that our significant increases in the LMDS bidding credits, together with the establishment of a new "very small" business category, will help small businesses participate in the upcoming auction.