The Settlement Between the U.S. Government and Nextwave, Inc. to Resolve Disputed Spectrum Licenses

Subcommittee on Telecommunications and the Internet
December 11, 2001
3:00 PM
2123 Rayburn House Office Building

FCC Chairman Michael Powell and DoJ Counsel Joseph Hunt

Mr. Jim Winston
Corporate Secretary
Urban Communicators
1155 Connecticut Avenue, NW
Washington, DC, 20036

Good afternoon Chairman Upton and members of the Subcommittee, my name is James Winston, and I am Secretary and General Counsel of Urban Communicators PCS Limited Partnership ("Urban Comm").

Thank you for the invitation to appear before you today to discuss the proposed settlement between NextWave Telecom, Inc., the Federal Communications Commission, the Department of Justice, and the Auction 35 participants. I wish to make two points concerning the settlement. It is a fair and reasonable result for the parties and the American public, and Congress should direct the FCC and DOJ to negotiate a similar settlement with Urban Comm.

I am pleased to appear before the Subcommittee today on behalf of Urban Comm. I have had the honor of appearing before the Subcommittee in the past in my capacity as Executive Director of the National Association of Black Owned Broadcasters ("NABOB"). In many ways, my appearance today is an extension of my role with NABOB, because Urban Comm was formed by a group of NABOB members. In the spring of 1993, at a NABOB conference, Sydney Small, Chairman of Urban Comm and a member of the NABOB Board of Directors, suggested that NABOB members form a company to participate in the PCS auctions.

In the spring of 1994, Urban Comm was formed and funded by NABOB members. Urban Comm immediately began to participate in the FCC's rule making proceedings in which the Commission established the rules for auctioning PCS licenses. Unfortunately, as I will describe in detail below, over the strenuous objections of Urban Comm, the FCC adopted a number of auction rules which had the ultimate effect of undermining the ability of the C-block and F-block PCS licensees to obtain financing to pay their license debt to the FCC and to construct and operate their PCS systems.

In 1996 Urban Comm, like NextWave, obtained PCS licenses in the C-block auction. Urban Comm obtained ten licenses for an aggregate bid price of $74.6 million and paid a down payment of $7.46 million for those licenses. Unfortunately, immediately after the C block auction was concluded, the FCC announced another PCS auction for the D, E, and F frequency blocks. The D

and E-block licenses had no small business incentive rules. The F-block licenses had bidding credit rules and ten year payment terms similar to those applied to the C-Block.

The market for financing of wireless companies promptly experienced a downturn as financial institutions feared a PCS spectrum glut from the D, E and F-block auctions, which were announced before the C block bidders even received their licenses. The financial market downturn precluded Urban Comm from obtaining financing to construct its system. Urban Comm, unlike NextWave, made its first quarterly interest payment to the FCC on its license debt. However, Urban Comm was not able to make its second interest payment. On October 28, 1998, Urban Comm filed for Chapter 11 reorganization under the Bankruptcy Code.

Shortly after its Chapter 11 filing, Urban Comm became involved in an adversary proceeding with the FCC in the Bankruptcy Court. The Bankruptcy Court has reserved deciding a motion filed by the FCC to dismiss the Urban Comm adversary proceeding. The Bankruptcy Court's position is that it would be a waste of judicial resources to litigate the same issues in the same forum as NextWave's Chapter 11 case, as the Chapter 11 cases of NextWave and Urban Comm are so similar that a decision involving one would equally apply to the other.

The FCC's C-block and F-block auctions were conducted shortly after Congress gave the FCC auction authority. The auction legislation imposed an obligation on the FCC to adopt auction rules which would promote opportunities for small businesses and businesses owned by minorities and women. Urban Comm participated actively in the FCC's rule-making proceedings to develop rules and procedures which would promote ownership among small businesses and businesses owned by minorities and women. Unfortunately, the FCC did not adopt rules as proposed by Urban Comm. Instead, the FCC adopted auction rules and procedures which ultimately worked to prevent the C-block and F-block licensees from successfully financing and building their businesses. The FCC has since abandoned many of its C and F-block auction rules, thus treating the C and F-block as a failed experiment.

Among the rules and procedures adopted by the FCC which hampered and eventually undermined the C-block bidders were the following:

1. In the first broadband PCS auction, the FCC divided the PCS spectrum into three frequency blocks: A, B, and C.

2. The FCC determined that small businesses and businesses owned by minorities and women would be given bidding credits of up to 25%, and would be allowed to pay for their licenses over a period of ten years.

3. However, the FCC ruled that bidding credits and payment terms could not be used in the A and B-block auctions.

4. Then, the FCC ruled that the A and B-block auctions would be conducted before the C-block auction.

5. These two critical decisions, (1) not allowing the use of bidding credits and payment terms in the A and B-block auction and (2) conducting the A and B-block auctions first, were major blows to the ultimate success of minorities, women and small businesses in the PCS business. Because of these decisions, the dire fate of the C-block auction may have been sealed long before the C-block auction ever commenced.

6. By permitting the A and B-block auction to go forward before the C-block auction, the FCC allowed the large cellular telephone companies to acquire the first licenses for the PCS service -- a service which was heralded by the FCC as an opportunity for new entrants to compete with the existing cellular companies. Instead, the existing carriers, who already had every advantage (huge existing cellular telephone businesses, built-out networks and cell sites, fully staffed companies, financial leverage, and operating experience) were also given the advantage of receiving their PCS licenses first. Thus, the existing cellular companies received their licenses and began building their networks in March 1995 -- a year and a half before Urban Comm and other C-block auction winners would receive their licenses in September 1996.

7. The C-block auction was delayed by court cases, and did not begin until December 1995. By that time, because of the Supreme Court decision in the Adarand case, the FCC had abandoned its bidding credits for minorities and women, and provided only a small business bidding credit in the C-block auction.

8. When the C-block auction began in December 1995, virtually all bidders qualified for the same bidding credit and ten year payment terms. Thus, the bidding credits and ten year payment terms, which may have been useful to small businesses bidding against the large companies in the A and B-block auctions, were totally incapable of achieving their intended purpose in the C-block auction, because the large cellular companies did not bid in the C-block auction. Those companies had obtained all of the spectrum they needed in the A and B-block auction.

9. Thus, the C-block auction pitted all of the small businesses against each other in a PCS "ghetto." Because all of the bidders had the same bidding credits, the bidding credits were nullified and were of no value.

10. Similarly, because the small companies were not bidding against the existing cellular companies, the ten year payment term did not provide them with the ability to bid against the large companies. Instead, the ten year payment term merely plunged the FCC into the role of creditor, a role for which it was woefully unprepared, and as we now see, helped lead to the ultimate demise of the C-block.

11. The correctness of this analysis is borne out by the FCC's refusal to provide any payment terms in any of the auctions it has conducted in recent years, including the Auction 35 re-auction of C-Block licenses.

12. After conclusion of the C-block auction, the FCC further undermined financing opportunities for the C-block auction winners by announcing on June 26, 1996, just seven weeks after the conclusion of the C-block auction, that the FCC would auction D, E, and F-block PCS licenses, beginning August 26, 1996. As a result of a feared spectrum glut, bid prices in the D, E, and F-block auction were only a fraction of the prices bid in the C-block auction.

13. In September 1996, well the after the close of the C-block auction, the FCC sent to C-block auction winners a series of promissory notes and security agreements, and required all auction winners to sign these documents without negotiation or revision. The notes and security agreements established the FCC as the senior secured lender for the C-block licensees. The notes and security agreements added an additional unexpected difficulty for C-block auction winners seeking to obtain financing to construct and operate their systems. The FCC gave bidders no warning prior to the auction that they would be required to sign such notes and security agreements. These notes and security agreements proved to be the final nail in the coffins of most C-block licensees.

Urban Comm does not provide this long list of counterproductive FCC actions to place blame on the FCC. Rather, it is Urban Comm's intent to put the current settlement in its proper historical context.

Throughout the course of its Chapter 11 proceeding, Urban Comm has sought to negotiate a settlement of its adversary proceeding with the FCC. However every effort to negotiate a settlement with the FCC has been rebuffed with the same mantra, "We can't settle with you until we settle with NextWave." In October of this year, after several press reports of an imminent settlement between NextWave and the FCC, officers of Urban Comm traveled to the FCC to meet with FCC and DOJ officials to discuss the inclusion of Urban Comm in any potential settlement with NextWave. Again we were told that a settlement with NextWave would have to be concluded before the FCC would commence settlement discussions with Urban Comm.

Even now, after the NextWave settlement discussions have been concluded, we continue to be rebuffed in our efforts to initiate settlement discussions. We met with FCC officials again last week and were told that, even though the FCC has completed its negotiations with NextWave, no settlement discussions would be commenced with Urban Comm until the NextWave settlement is approved. We were also told that, if the NextWave settlement is not approved, no settlement discussions will be held with Urban Comm, and the FCC will continue its litigation against Urban Comm.

Therefore, Urban Comm is here today to ask Congress to end the long, tortured trail of the C-block and F-block PCS licensees. The settlement of the NextWave litigation which has been presented to Congress is a reasonable and appropriate means of resolving this ongoing saga. The C-block and F-block PCS auctions were a failed experiment by the FCC. The FCC experimented with a number of auction ideas in that auction which it has subsequently abandoned -- such as setting itself up as the auction winner's senior creditor and holding this position for a ten year period.

The parties to the NextWave settlement have provided a reasoned justification for approving the NextWave settlement. Those reasons are equally applicable to the Urban Comm case. A settlement with Urban Comm along the lines of the settlement with NextWave will provide concrete benefits to the American people and therefore would be in the public interest.

A settlement with Urban Comm will prevent years of additional litigation. As the parties to the NextWave settlement have advised Congress, absent a settlement, the litigation in the NextWave and Urban Comm cases could continue for years. Even if the FCC is successful in its request to the Supreme Court for review of the D.C. Court of Appeal's NextWave decision, the litigation could continue for years even after a favorable decision by the Supreme Court. The licenses would continue to go unused during such litigation, and the American public would be deprived of much needed improvements in PCS service which the spectrum could permit.

And in a settlement, Urban Comm will not be made whole. A settlement cannot restore Urban Comm's lost past business opportunities. Urban Comm has approached the FCC many times over the past three years in an effort to settle the pending litigation. Urban Comm has offered to pay all of its license debt immediately along with all interest and penalties. Had the FCC settled with Urban Comm previously, Urban Comm could have emerged from its Chapter 11 proceeding, constructed its network and become a viable PCS business and competitor to the existing companies.

Similarly, a settlement will foreclose future PCS business opportunities for Urban Comm. In a settlement Urban Comm will lose the opportunity to become a PCS provider. Unlike NextWave, Urban Comm has no PCS licenses other than those involved in the Chapter 11 proceeding. A settlement in which Urban Comm returns to the FCC all of its PCS licenses involved in the Chapter 11 proceeding will leave Urban Comm no licenses with which to begin constructing a PCS business. Thus, Urban Comm will have foregone its chance to build a PCS business.

In spite of the opportunities which Urban Comm must forego in a settlement, Urban Comm recognizes that the terms described in the NextWave settlement are a reasonable compromise of the competing interests being addressed. Urban Comm, therefore, is prepared to enter into a settlement similar to that negotiated between the FCC, DOJ, NextWave and the Auction 35 parties.

Urban Comm's concern with the settlement legislation therefore is not with its terms but with its limited scope. The Bankruptcy Court has determined that the issues to be resolved in the Urban Comm case are so similar to those to be resolved in the NextWave case that the Urban Comm case has essentially been held in abeyance awaiting a resolution of the NextWave case. Therefore, as a legal matter, settlement of both cases at this time is appropriate. Urban Comm's debt to the FCC of approximately $75 million is only 1.6% of NextWave's debt. Consequently, a settlement with Urban Comm raises none of the Congressional budgetary issues that the NextWave settlement raises.

Therefore, Urban Comm requests that Congress take action in considering the NextWave settlement to assure that the FCC and DOJ immediately initiate settlement discussions with Urban Comm. Urban Comm submits that such assurances can best be achieved by: (1) including language in the pending settlement legislation directing the FCC and DOJ to immediately commence settlement discussions with Urban Comm, and (2) providing authority in this legislation to permit a settlement similar to the settlement negotiated with NextWave.

Thank you for the opportunity to present Urban Comm's views on this important subject. I look forward to answering any questions you may have.

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