October 20, 1994 ANSWERS TO QUESTIONS CONCERNING BROADBAND PCS AUCTIONS In late August, 1994, the Commission conducted a series of seminars to familiarize the public with the rules that will apply to the upcoming auctions of licenses to provide Personal Communications Services in the 2 GHz band (broadband PCS). Attendees were invited to submit written questions to the Commission, which many did. In addition, over the last several weeks the Commission has received numerous informal inquiries concerning our auction rules for broadband PCS. In this Public Notice, the Commission hopes to provide guidance to prospective bidders on broadband PCS licenses. Some issues regarding the Commission's broadband PCS auction rules are addressed in the recently released reconsideration order (see Fourth Memorandum Opinion and Order in PP Docket No. 93-253, FCC 94-264 (released October 19, 1994)) while others are still subject to reconsideration. These issues are not treated in this Public Notice. Some of the inquiries we received have posed similar questions in slightly different ways that reflect the questioner's particular circumstances. Rather than provide specific guidance to some but not all questioners, the Commission has recast the questions in general language that incorporates the most commonly asked questions. Questions and answers are grouped in the following categories: general questions, questions pertaining to the auction process, and questions pertaining to designated entity applicants. General Questions Q: How will applicants be notified if there is a problem with their Form 175 short-form applications? A: Shortly after the deadline for submission of Form 175 applications, the Commission will issue a Public Notice informing applicants of their status. That Public Notice will identify applications that are accepted, those that contain minor defects that may be resubmitted, and those that are rejected. It is each applicant's responsibility to review that Public Notice to determine the status of its Form 175 application. The Commission will not individually notify applicants of defects that may be corrected through resubmission. Q: Can an individual participate in the auction? A: In the broadband PCS auction for licenses in frequency blocks A and B, which is scheduled to begin on December 5, 1994, individuals may participate freely as applicants or as investors in applicants. The same will be true of our third broadband PCS auction -- for licenses in frequency blocks D and E. However, in the second auction, for licenses in frequency blocks C and F, only individuals who meet the eligibility requirements set forth in our Rules may participate. Q: What is the FCC doing to ensure that businesses acquiring licenses have the capital necessary to provide service and that they do not fail? A: The FCC does not provide any guarantees of success in the marketplace to winning bidders. Applicants are required to certify as part of their Form 175 short-form applications that they are financially qualified. The FCC does not require that applicants make a showing of their financial qualifications; however we take all certifications very seriously, and penalties for a false certification could include loss of any auction payments made, loss of other licenses held by the applicant, disqualification from future auctions, and possible criminal prosecution. Q: Where can I obtain information and maps regarding what area is within each BTA and MTA? A: On September 22, 1994, the FCC issued a Public Notice listing of all of the counties contained in each BTA and all of the BTAs contained in each MTA. This Public Notice (Report No. CW-94-02) is accessible on the Internet through anonymous ftp@fcc.gov, and copies of the Public Notice can be obtained through the FCC's copy contractor, International Transcription Service, by calling (202) 857-3800. The information contained in the Public Notice is based on material copyrighted by Rand McNally and Company. Maps of BTAs and MTAs can be obtained from the Personal Communications Industry Association (PCIA) under a licensing agreement PCIA has entered with Rand McNally & Company. Q: How will bidders be able to submit bids on broadband PCS licenses? A: On-site bidding will take place at The Postal Square Building, 2 Massachusetts Avenue, N.E., Washington, D.C. (adjacent to Union Station). Bidders will also be able to submit bids through bid assistants via telephone, with bid confirmation transmitted via facsimile. The Commission is considering whether to enable bidders also to participate in the auction through remote computer access via a value added network. In a future Public Notice, the Commission will inform prospective bidders of the procedures if the latter option is to be made available. Q: What happens to a PCS license after the 10-year license term? Will the licensee have to be subjected to another auction? A: The legislation authorizing the FCC to conduct auctions specifically limits this authority to "initial" licenses, so renewal applications will not be subject to auction. The Commission has not yet set forth standards for renewal of PCS licenses. In the cellular services, however, licensees who have operated cellular systems in the public interest, and who have met all applicable performance requirements, are entitled to a renewal expectancy at the expiration of their initial license term. Q: What does it mean when the FCC says that no one can have more than 40 MHz of PCS spectrum in one area? A: This restriction, contained in Section 24.229(c) of the Commission's Rules, provides that no entity may be licensed to provide PCS to any particular geographic area over more than 40 MHz of spectrum. In addition, no person or entity is permitted to hold an attributable interest in PCS licensees that, when considered together, are licensed to provide PCS on more than 40 MHz of spectrum. This rule was promulgated to further the development of a competitive post-auction PCS market structure by ensuring that no entity could, in effect, "corner the market" on PCS spectrum. Q: Will the FCC grant all PCS licenses at the same time or will licenses be issued in the order in which they are auctioned? A: The FCC currently does not plan to delay the grant of any PCS license so as to coincide with the grant of any other PCS license. To do so would contravene our stated policy designed to foster the rapid initiation of new competitive services to the public. The time that will be required to review an auction winner's long-form application for a license will vary depending on the complexity of the information submitted, the resources available to the Commission for processing, whether any petitions to deny have been filed against the application, and the complexity of the issues raised in any such petitions. Q: If an auction winner defaults on its payment obligation, what would be the procedure for someone else to acquire that license? A: If an auction winner to whom a license has been granted defaults, the license will automatically be cancelled. The license will then revert to the Commission, and the Commission will re-auction the license in a later auction event. The public would be informed through public notices if licenses are to be re-auctioned. Q: Many of the likely applications of PCS technology involve direct interconnection with local exchange equipment and switches. Does this create an advantage for the local exchange carriers who are bidding on PCS licenses in the wireline service areas? What is the FCC doing to address the interconnection issue? A: If a LEC also owns a cellular system in its wireline service area, it is ineligible to own more than 10 MHz of PCS spectrum in that area. Thus, as a PCS operator, it would not be in a position to benefit from its LEC status vis-a-vis a competing 30 MHz PCS operator. The FCC has instituted a proceeding in which we are asking whether interconnection rates should continue to be set by agreement or by tariff. The Commission will use its authority under Title II of the Communications Act to monitor what is happening to make sure that non-RBOC licensees will not be discriminated against and we will be vigilant in our efforts to prevent abuses from arising. Questions Pertaining to the Auction Process Q: Why did the FCC choose such a complex auction process? A: The simultaneous multiple round auction design the FCC is using for PCS auctions has a couple of important advantages over the simpler, sequential auction design. First, the simultaneous multiple round design conveys to bidders the most information about the true value of licenses during the course of the auction, thereby improving bidders' confidence and enabling them to minimize the "winner's curse" (i.e., the tendency to overbid). In addition, in a sequential auction, the results of later auctions will likely tell a bidder too late that it should have bid (or not bid) on an earlier-auctioned license. By offering all substantially identical or complementary licenses at the same time, bidders will be better able to effectuate their aggregation strategies. This will tend to result in the creation of more efficient service that will bring greater competition, better service and lower prices to consumers. Q: The activity rules force bidders to bid in each round. Why should this be required? A: If there were no requirement that bidders place bids in each round of the auction, bidders would naturally tend to hold back, waiting to see what others bid. If a substantial number of bidders adopt this strategy, the auction might proceed exceedingly slowly, or it might close prematurely. Activity rules are necessary to ensure that auctions progress at a reasonable pace and that useful information about the value of licenses is conveyed to bidders throughout the auction. Q: How will the FCC determine what licenses I may bid on in the auction? A: Bidders will be allowed to place bids only on licenses for which they applied on their FCC Form 175 application, but the precise amount of bidding eligibility (i.e., the amount of bids, in terms of MHz-pops, that a bidder may place in any round) will be determined by the amount of upfront payment submitted by the bidder prior to the auction. The FCC will translate the dollar amount of the upfront payment into a MHz-pop figure, and the computer system will not allow a bidder to enter a set of bids if the total number of MHz-pops represented by the licenses on which bids are placed exceeds the number of MHz-pops to which its upfront payment translates. If the bidder's eligibility drops during the course of the auction (due to bidding below the required activity level), the revised eligibility will be applied by the computer system. Therefore, in order to avoid having its eligibility reduced, a bidder must pay attention to the number of MHz-pops associated with each license on which it places bids, and ensure that its bidding in each round of the auction exceeds its required activity. Q: Could you explain the activity rules in terms a layman can understand? A: As explained above, each bidder's upfront payment will determine its "required activity level." The term "required activity level" refers to the number of MHz-pops on which a bidder must be "active" (i.e., submit a valid bid or hold the high bid from the previous round) to avoid having its eligibility reduced in future rounds. In stage I of the auction, each bidder must be active on of the MHz-pops on which it is eligible to bid. In stage II of the auction, each bidder must be active on of the MHz-pops on which it is eligible to bid. In stage III, each bidder must be active on all of the MHz-pops on which it is eligible to bid. Unless an activity rule waiver is applied, the following eligibility reduction will occur if a bidder's activity falls below the required activity level in a round: Auction Stage I: Loss of 3 MHz-pops in eligibility for each MHz-pop below required level Auction Stage II: Loss of 1.5 MHz-pops in eligibility for each MHz-pop below required level Auction Stage III: Loss of 1 MHz-pop in eligibility for each MHz-pop below required level The Commission has retained the discretion to reduce the required Stage III activity level by Public Notice in advance of each auction, but in no event will a bidder's required activity level in Stage III be less than 95 percent of the MHz-pops on which it is eligible to bid. Q: How do activity rule waivers work? Can an activity rule waiver be submitted by the bidder, or is it only entered automatically by the FCC if a bidder does not bid or if its bids fall below its required activity level? A: When a bidder's activity in a round falls below its required activity level, a waiver will automatically be applied if the bidder has a waiver available. In this event, however, a bidder will be offered the option of overriding the automatic waiver mechanism, enabling it to intentionally reduce its eligibility and save the waiver for later use. Bidders also will be able to submit an activity rule waiver "proactively". A bidder may wish to do so if it is unable or does not desire to bid in a particular round of the auction and wishes to ensure that the auction will not close in that round. (Submission of a proactive waiver keeps the auction open even if no other valid bids are submitted, but application of an automatic waiver will not.) Q: Is a bidder who withdraws a high bid in a round considered to be "active" on that license in the next round? A: Yes. Withdrawal of a high bid does not negate the fact that the bid was made and that it was the high bid. Bidders should keep in mind, however, that they may be required to pay a penalty if they withdraw a high bid. Q: How will bidders know when a round is over? A: The FCC will announce at the beginning of each round when the bid submission period will end. After the round results from the bid submission period are posted, we will announce the bid withdrawal period. This information will be available both at the auction site and over any value added network created for remote bidding. A countdown clock also will be provided to inform bidders as to the time remaining in each period. Q: How will auction results be made public? A: Results from each round of the auction will made available 1) at the auction site, 2) on the Internet, and 3) to bidders over the FCC BIDDER ONLINE value added network, if the FCC decides to offer the option of remote electronic bidding. Prospective bidders interested in the remote electronic bidding option must register with Business Information Network by November 15, 1994 by calling (800) 336-9246. Charges of $200 for the Set-up Kit and software and $23 per hour of online access will apply. Results posted on the Internet can be accessed at the following Internet address: anonymous ftp@fcc.gov Questions Pertaining to Designated Entity Applicants Q: What provisions are available for small businesses, rural telephone companies and businesses owned by minorities and/or women (the "designated entities") in the auction for MTA licenses on frequency blocks A and B? A: The FCC did not adopt special payment provisions to benefit designated entities in the bidding itself in this first auction. Thus, the bidding credits and installment payment plans that will be available in the auction for licenses on frequency blocks C and F (the "Entrepreneurs' Blocks) are not available in the auction that begins on December 5, 1994. The Commission's tax certificate policy, however, will apply to sales of block A and B licenses and to investments in certain applicants for these licenses. In addition, the FCC's partitioning policy with respect to rural telephone companies will apply to the MTA license auction. Rural telephone companies will be able to be licensed for partitioned broadband PCS service areas in one of two ways: 1) they may form consortia to bid on MTA licenses, with the license to be partitioned among the consortia members in the post-auction licensing process; or 2) through private post-licensing negotiation with an MTA licensee, they may obtain licenses for partitioned areas that are reasonably related to their wireline service areas. A proceeding is currently pending to determine whether the partitioning policy should be extended to businesses owned by minorities and/or women. See Further Notice of Proposed Rule Making in PP Docket No. 93-253, FCC 94-198 (released August 2, 1994). Q: What are tax certificates and how do they benefit designated entities? A: Under Section 1031 of the Internal Revenue Code, the Commission may upon request grant tax certificates. A tax certificate enables the grantee to defer recognition of gain for tax purposes on the sale of an investment in a communications property. With respect to designated entities bidding on PCS licenses, the tax certificate policy could work in two ways. First, an investor in a minority- or women-owned PCS licensee would be able to defer the payment of capital gains tax upon the sale of its investment, if it satisfies certain conditions regarding reinvestment of the gain. Second, a non- designated entity PCS licensee would be entitled to deferral of gain if it transfers its license to a business owned by minorities and/or women, again subject to reinvestment conditions. The tax certificate policy is intended to serve both to attract investment capital to entities that have historically faced discrimination in gaining access to capital, and to encourage sales to minority- and women-owned firms. Q: How can a designated entity licensee avoid having to pay penalties if its owner dies during the holding period, causing the licensee to lose its designated entity status? A: In the event of the death of a designated entity owner, the licensee could make a request with the Commission for a waiver of the holding rule requirements and the unjust enrichment provisions applicable to installment payments and bidding credits. Q: If a license obtained with a bidding credit is transferred more than 10 years from the date of the initial license grant, would the bidding credit have to be refunded? A: No. Q: Has the FCC prepared a Designated Entities FCC Auction Guidebook? If so, how can I obtain a copy? A: The FCC has not prepared such a document. Law firms or trade associations such as the Personal Communications Industry Association (PCIA) may have developed such guidebooks. Q: Are there any "designated" financial institutions that will provide/offer funding to designated entities? Are there qualified brokers and/or consultants who are reputable, who can assist with the process? A: The FCC is not in a position to recommend specific potential sources of financing to prospective bidders. However, our Office of Communications Business Opportunities (formerly the Office of Small Business Activities) is available to provide assistance to individuals or groups seeking to enter the PCS industry. OCBO's telephone number is (202) 418-0990. Q: Are advance payments also discounted like the actual bid? A: The upfront payment for all entities bidding in the entrepreneurs' blocks is $0.015 per MHz pop. That is a 25 percent discount from the $0.02 per MHz pop required in the other auctions. In addition, the down payment for small businesses and minority and women-owned businesses will be calculated based on the bid price after the bidding credit is subtracted. So, if a small minority-owned firm bid $1 million, its total payment would be $750,000 after subtraction of the 25 percent bidding credit. The 10 percent down payment would be $75,000, one-half payable five business days after close of the auction and the other half due five business days after grant of the license. Q: Does a university (a non-profit institution) which applies for an "Entrepreneurs' Block" license it intends to use in training students in the development and use of PCS technology qualify as a designated entity? A: If the university meets our gross revenue and total assets tests it may qualify as an entrepreneur or as a small business. The Commission has adopted no PCS rules specifically benefitting universities or entities that wish to acquire licenses for training purposes. Q: Does the FCC have any guidelines regarding the incorporation date or length of time a minority- or women-owned business must have been in existence in order to bid in an auction? A: There are no requirements regarding the length of time a designated entity business must have been in existence before the auction. All affiliates of a new business will be counted toward applicable financial caps, however. Q: Can a designated entity use a limited partnership or a limited liability company or any other lawful structure, so long as control mechanisms are equivalent and within FCC guidelines? A: Yes. In fact, in the Fifth Report and Order the Commission has specified various guidelines for limited partnership applicants. Q: Can a major telecommunications company provide debt in any amount to a designated entity? A: Debt is not attributable unless it appears to be equity disguised as debt. Factors such as the interest rate and length of the repayment period would have to be considered. Q: Can a major telecommunications company enter into agreements with a number of designated entity applicants around the country for bidding purposes, so long as each designated entity remains in control? A: The rules applicable to investment in designated entities would apply to each such investment, and assuming that none of the designated entity applicants had applied for licenses in any of the same markets, the rules do not restrict such arrangements. Q: Can designated entities bid at the A and B band PCS auction? If so, do they receive any special benefits? A: Designated entities are free to bid in any auction. The only benefit available in the non-entrepreneurs blocks, however, is the tax certificate program for businesses owned by minorities and women. Q: Is there minimum capitalization needed for a designated entity? A: No, although designated entities must be prepared to pay half of the 10 percent down payment five business days after the auction closes.