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FCC Releases Full Text of 700 MHz Second Report and Order; Auction to Begin by January 28, 2008
The Federal Communications Commission (FCC) released the full text of its Second Report and Order adopting rules for the 700 MHz commercial and public safety spectrum. The order addresses the Upper and Lower 700 MHz band plans, build-out requirements, open access for the Upper 700 MHz C Block, the Public/Private Partnership for the public safety broadband spectrum and the Upper 700 MHz commercial D Block, technical requirements, and auction rules. According to statute, the auction of the commercial spectrum must begin on or before January 28, 2008.
THE BAND PLAN
The FCC made revisions to both the commercial and public safety band plans. The new band plan provides for auctioning a total of 62 megahertz of spectrum – 30 megahertz in the Lower 700 MHz Band and 32 megahertz in the Upper 700 MHz Band.
Lower 700 MHz Band
Three commercial spectrum blocks will be auctioned in the Lower 700 MHz portion of the band. Block A (with 12 MHz of paired spectrum) is divided into 176 Economic Areas (EAs) as defined by the U.S. Department of Commerce, and spectrum Block B (also with 12 MHz of paired spectrum) is divided into 734 Cellular Market Areas (CMAs) for auction and licensing. The CMAs are made up of: (1) 305 Metropolitan Statistical Areas (MSAs) as defined by the Department of Commerce and (2) 429 Rural Service Areas (RSAs), which are clusters of rural counties as specified in the FCC’s rules. Block E (with 6 MHz of unpaired spectrum) is divided into 176 EAs. The Lower 700 MHz Blocks C and D were previously auctioned.
Upper 700 MHz Band
In the Upper 700 MHz Band, Block C was expanded by 2 MHz, and as a result now contains 22 MHz of paired spectrum. It was divided into 12 Regional Economic Area Groupings (REAGs). Block D (with 10 MHz of paired spectrum) will be auctioned as one nationwide license. As discussed below, the Block D licensee will enter into a 700 MHz Public/Private Partnership with the licensee that will be assigned the public safety broadband spectrum.
Upper 700 MHz Commercial Guard Bands
The FCC also made changes to the Upper 700 MHz Commercial Guard Bands. Specifically, Guard Band Block A (consisting of 2 MHz of paired spectrum) was relocated to a position between the Upper 700 MHz C and D Blocks. Guard Band Block B was reduced from 4 MHz of paired spectrum to 2 MHz of paired spectrum and relocated to a position just above the public safety portion of the Upper 700 MHz spectrum. These blocks were previously auctioned. Nextel, which was the primary winner of the Guard Band Block B licenses, returned its Guard Band licenses to the FCC as part of its arrangement in the 800 MHz rebanding proceeding.
The following spectrum chart shows the reorganized 700 MHz band plan.
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The FCC considered the 700 MHz band as a whole, including the spectrum that had already been auctioned, in ultimately deciding the license areas and block sizes for the revised band plan. The FCC included CMAs in the revised band plan for the unauctioned blocks to address the needs of small and rural carriers. By dividing Lower 700 MHz Block B into CMAs, it will allow bidders who are already licensed in adjacent Lower 700 MHz Block C to aggregate spectrum. The FCC allocated the 22 MHz Upper 700 MHz Block C to promote broadband services and to accommodate new 4G technologies that can compete with high capacity wireline broadband offerings. The FCC adopted REAG license areas for this block to address the needs of companies seeking to create a larger regional or nationwide footprint. REAGs are sufficiently large for these types of new entrants, but are not so large as to preclude medium-sized companies from acquiring the licenses at auction. Larger licenses can help to achieve economies of scale which may enable carriers to offer new and innovative services.
Public Safety Spectrum
As a result of the changes to the Upper 700 MHz commercial Guard Band blocks discussed above, the public safety allocation was shifted downward by 1 MHz, and the lower end of the public safety spectrum is now adjacent to the Upper 700 MHz commercial Block D. The public safety allocation was reconfigured by: (1) eliminating the wideband block, (2) consolidating the narrowband spectrum into one block of 12 MHz of paired spectrum at the upper end of the allocation, (3) creating a broadband block of 10 MHz of paired spectrum at the lower end of the allocation, and (4) inserting an internal guard band consisting of 2 MHz of paired spectrum between the broadband and narrowband blocks.
The following spectrum chart shows the reorganized 700 MHz public safety spectrum.
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Since the DTV transition for Canadian television channels 64 and 69 will not be completed until August 31, 2011, the shifting of the public safety allocation downward by 1 MHz will result in 1 MHz of the public safety narrowband block being available for interference free operations in areas near the Canadian border due to the fact that Canadian television channels 63 and 68 will be transitioning sooner.
The public safety broadband block will be licensed to a single nationwide entity known as the Public Safety Broadband Licensee. No commercial interest may be held in the licensee, and no commercial interest may participate in the management of the licensee. The licensee shall be a non-profit organization with an eleven member board of directors consisting of representatives from nine public safety and governmental organizations listed by the FCC as well as two representatives from the FCC.
OPEN PLATFORMS
Upper 700 MHz Block C licensees must allow customers, device manufacturers, third-party application developers, and others to use or develop the devices and applications of their choosing in C Block networks, so long as they meet all applicable regulatory requirements and comply with reasonable conditions related to management of the wireless network (i.e., do not cause harm to the network). Specifically, the Upper 700 MHz Block C licensee cannot:
- Block, degrade, or interfere with the ability of end users to download and utilize applications of their choosing on the licensee’s Block C network, subject to reasonable network management. Wireless service providers subject to this requirement will not be allowed to disable features or functionality in handsets where such action is not related to reasonable network management and protection, or compliance with applicable regulatory requirements. For example, providers may not “lock” handsets to prevent their transfer from one system to another.
- Block Wi-Fi access, MP3 playback ringtone capability, or other services that compete with wireless service providers’ own offerings.
- Exclude applications or devices solely on the basis that such applications or devices would unreasonably increase bandwidth demands.
- Impose any additional discriminatory charges (one-time or recurring) or conditions on customers who seek to use devices or applications outside of those provided by the licensee.
- Deny access to a customer’s device solely because that device makes use of other wireless spectrum bands, such as cellular or PCS spectrum.
The FCC declined to extend its open access requirements to the other commercial 700 MHz spectrum blocks, or to impose broader requirements, such as wholesale or interconnection requirements, for Upper 700 MHz Block C. Furthermore, the FCC did not require wireless service providers to allow the unrestricted use of any device or application on their networks. Wireless service providers may continue to use their own certification standards and processes to approve use of devices and applications on their networks so long as those standards are confined to reasonable network management. For example, providers can choose their air interface technology and can deny service to devices or applications that cannot operate on the same technology. Providers are also permitted to maintain network control features that permit dynamic management of network operations, including the management of devices, and will be allowed to restrict use of the network to devices compatible with the network control features.
The FCC requires certain minimum steps to ensure that device manufacturers and application developers have the ability to design products for this spectrum in a timely manner. Specifically, the Block C licensee must:
- Publish standards no later than the time at which it makes such standards available to any preferred vendors (i.e., vendors with whom the provider has a relationship to design products for the provider’s network).
- Provide to potential customers notice of the customers’ rights to request the attachment of a device or application to the licensee’s network, and notice of the licensee’s process for customers to make such requests, including the relevant network criteria.
- Maintain its obligation to ensure that their networks and devices comply with applicable regulatory requirements (e.g., power and emission limits, E911, CALEA, etc.). For instance, if a provider is implementing E911 using a handset-based solution, its obligation to connect handsets to its network would not extend to handsets that are not capable of providing automatic location information to the network.
The FCC indicated that it intends to “vigorously enforce” its open platforms requirements, and noted that the formal and informal complaint process is available to any person who believes that a C Block licensee’s refusal to attach a proposed device or application is a violation of the FCC’s Rules. The FCC specifically committed to rule on any complaint within 180 days of receipt. Once a complainant makes a prima facie case that the C Block licensee has refused to attach a device or application, the licensee will have the burden of proof to demonstrate that that it adopted reasonable network standards and reasonably applied the standards in the complainant’s case.
700 MHZ PUBLIC/PRIVATE PARTNERSHIP
The FCC mandated that the Public Safety Broadband Licensee and the Upper 700 MHz Block D licensee enter into a Network Sharing Agreement (NSA). Negotiations must commence within 30 days of (1) the Upper 700 MHz Block D licensee filing its long form application or (2) the FCC designating the Public Safety Broadband Licensee, whichever is later. Negotiations of the NSA must be completed within six months, and the NSA is subject to the approval of the FCC. The FCC will mediate, and if necessary, arbitrate any issues that are causing an impasse to the negotiations. The term of the NSA is to be commensurate with the term of the license, that is, for ten years commencing on February 17, 2009. Compliance with the NSA will be a condition of the Upper 700 MHz Block D license.
Spectrum Leasing
The NSA must call for the Public Safety Broadband Licensee to lease its spectrum to the Upper 700 MHz Block D licensee on a secondary basis, with the ability of public safety to preempt the use of the spectrum at any time without notice. Commercial users may not cause interference to public safety users and must accept interference from public safety users. For the limited purpose of this spectrum lease, the FCC waived the general prohibition against public safety licensees leasing excess spectrum capacity for commercial use. The NSA must also provide for the 700 MHz Block D licensee to lease the use of its spectrum to the Public Safety Broadband Licensee on a priority basis during times of emergency.
Shared Network Build-Out
The NSA must call for the Upper 700 MHz Block D Licensee to build out its network to be shared with the Public Safety Broadband Licensee. Network specifications in terms of equipment, technology, reliability, robustness, security, etc. must satisfy the needs of the public safety users, as represented by the Public Safety Broadband Licensee. The Public Safety Broadband Licensee must have operational control of the network to the extend necessary to ensure public safety requirements are met. In addition, at least one model handset must be made available to the Public Safety Broadband Licensee that includes an integrated satellite solution capable of operating on both the 700 MHz public safety broadband spectrum and mobile satellite frequencies.
Seventy-five percent of the population must be covered within 4 years, 95 percent of the population within 7 years, and 99.3 percent of the population within 10 years of the commencement of the license term, which begins on February 17, 2009. A specific build-out schedule is to be included in the NSA, which must include major highways and interstates, as well as incorporated communities with populations in excess of 3,000.
Reimbursement for Relocation of Public Safety Narrowband Licensees
As a result of the reorganization of the public safety 700 MHz band plan, there are some public safety narrowband licensees who have already built out their systems and will be required to retune their equipment to operate on the lower frequencies. The FCC mandated that the Upper 700 MHz Block D licensee reimburse the public safety entities for the actual cost of retuning equipment, provided that such equipment is operational and the cost information is provided to the FCC no later than 30 days after adoption of the Second Report and Order. Based upon estimates submitted by Motorola, the FCC capped the total reimbursement amount at $10 million.
Protection of the Public Safety Network
The FCC will require the Upper 700 MHz Block D licensee to set up special purpose entities, which will be bankruptcy remote, to hold the Block D license, to hold the network assets, and to lease the spectrum associated with the Block D license. Opinion letters will be required in association with the special purpose entities.
The FCC also established procedures for special temporary operation, transfer of the network assets and issuance of a new license in the event of cancellation of the Upper 700 MHz Block D license for failure to comply with the FCC’s rules or in the event of business failure.
Although the Upper 700 MHz Block D licensee may transfer or assign its license, subject to the consent of the FCC, partitioning or disaggregation of the spectrum will not be permitted.
BUILD-OUT REQUIREMENTS
The FCC also replaced its current “substantial service” performance requirement with new, more stringent performance requirements for the not-yet-auctioned commercial licenses in the 700 MHz Band. These include the use of interim and end-of-term benchmarks, with geographic area benchmarks for licenses based on CMAs and EAs, and population benchmarks for licenses based on REAGs. Licensees must meet the interim requirement within four years of the commencement of the license term and the end-of term requirements within ten years of the commencement of the license term. The license term begins on February 17, 2009. Failure to meet the interim requirement will result in a two-year reduction in license term from ten years (i.e., ending February 17, 2019) to eight years (i.e., ending February 17, 2017), as well as possible enforcement action, including forfeitures. The FCC also reserves the right for those that fail to meet the interim benchmarks to impose a proportional reduction in the size of the licensed area. Licensees that fail to meet the end-of-term benchmarks will be subject to a “keep-what-you-use” rule, under which the licensee will lose its authorization for unserved portions of its license area, which will be returned to the FCC for reassignment.
CMA and EA Licenses
For licenses based on CMAs and EAs (that is, licenses in the Lower 700 MHz band), licensees must provide signal coverage and offer service to: (1) at least 35 percent of the geographic area of their license within four years, and (2) at least 70 percent of the geographic area of their license at the end of the license term.
REAG Licenses
REAGs licensees (that is, Upper 700 MHz Block C) must provide signal coverage and offer service to: (1) at least 40 percent of the population of the license area within four years, and (2) at least 75 percent of the population of the license area by the end of the license term. In addition, for licenses based on REAGs, the build-out requirements will be applied on an EA by EA basis. Accordingly, to meet their benchmarks, REAG licensees must provide signal coverage and offer service to at least 40 percent of the population in each EA in its license area within four years and 75 percent of the population of each of these EAs at the end of the license term.
PARTITIONING/DISAGGREGATION
The FCC will permit partitioning and disaggregation of all licenses except for the Upper 700 MHz Block D license, subject to the consent of the FCC. Failure to meet the end-of-term benchmarks subject the licensees to the “keep-what-you-use” rules.
USE OF DYNAMIC SPECTRUM MANAGEMENT TECHNIQUES
In response to Google’s request, the FCC affirmed that nothing in the Commission’s rules generally prohibits 700 MHz licensees from using dynamic spectrum management practices, such as real-time auctions, but declined to mandate the use of dynamic spectrum management practices for 700 MHz Band licensees. Dynamic auctions can take many forms, although the central concept is to utilize intelligent devices to resolve spectrum access contention. The FCC also declined to adopt Vanu’s request that the Commission establish specific conditions for the particular type of dynamic auction proceedings it proposes.
AUCTION RELATED ISSUES
Reserve Prices
The FCC provided for aggregate reserve prices for each separate block of licenses to allow for the recovery for the public, a portion of the value of the public spectrum resource. If the auction totals for the licenses in any block satisfy the aggregate reserve for that block, all licenses in the block will be assigned based on the auction results, subject to completion of the licensing process, including review of the applicants’ qualifications. The Commission directed the Wireless Bureau to consider the relative valuation of differing blocks in the recent auction of AWS-1 licenses.
Using the results of the AWS Auction 66 as a guide, the FCC estimated that the reserve prices for the 700 MHz spectrum will be:
- Lower 700 MHz Block A: $1,789,485,600
- Lower 700 MHz Block B: $1,360,817,520
- Lower 700 MHz Block E: $ 894,742,800
- Upper 700 MHz Block C: $4,591,934,600
- Upper 700 MHz Block D: $1,749,031,000 (although the FCC noted that in light of the Block D license conditions essential to the public safety purpose of the 700 MHz Public/Private Partnership, it might be appropriate to expect the D Block licensee to contribute only about 75 to 80 percent of such an amount, or about $1.33 billion.)
If the auction results do not satisfy one or more of the block-specific reserves, the FCC will offer more flexible, less conditioned licenses in the Lower 700 MHz Blocks A, B, and E and the Upper 700 MHz Block C as soon as possible after the first auction. However, the FCC would likely reauction the Upper 700 MHz Block D nationwide license with the same restrictions if the reserve price is not met due to the important public interest policy reasons behind the 700 MHz Public/Private Partnership. Further, if relevant block-specific aggregate reserves are not satisfied, the FCC will utilize the same auction design, including the block-specific aggregate reserve price, anonymous bidding, and package bidding, insofar as possible.
Statutory Payment Deadlines
Because of the statutory requirement that all 700 MHz auction payments be deposited in the U.S. Treasury by June 30, 2008, the FCC will require that payment in full be made by the successful bidders as of the June 30, 2008 payment deadline, even if that date occurs before the conclusion of the licensing process.
Eligibility
The FCC did not find a significant likelihood of substantial competitive harm in a specific market, and to encourage maximum participation in the auction, the FCC declined to impose eligibility restrictions for the licenses in the 700 MHz Band.
Anonymous Bidding
To reduce the potential for anti-competitive bidding behavior, such as retaliatory bidding or other bidding activity that aims to prevent the entry of new competitors, the auction will be conducted using anonymous bidding procedures. Use of anonymous bidding procedures is not contingent on a pre-auction measurement of likely competition based on an eligibility ratio.
Anti-Collusion
The FCC’s previously determined that its standard anti-collusion rules will apply to the 700 MHz auction. Competing bidders may not in any way discuss bids or bidding strategy with each other. The rule applies from the time the short form application (FCC Form 175) is filed (likely in late November or early December) until the post-auction down payment is due (generally 10 business days after the completion of the auction). The anti-collusion rule applies to all short form filers, even those who do not ultimately qualify to bid or who drop out of the auction.
The anti-collusion prohibition includes any discussions that can have an effect on bids or bidding strategy, such as joint marketing arrangements or mergers and acquisitions. The prohibition applies only to bidders that list competing licenses on their short form applications. Bidders that have agreements or understandings (such as a letter of intent) and disclose them on their short form applications may have discussions consistent with such disclosures.
To further prevent collusive behavior in the auctions, in the Second Report and Order, the FCC clarified the obligation that applicants in FCC auctions must report any communications of bids or bidding strategies that are prohibited by the FCC’s rules. Any applicant that makes or receives such a communication is required to report such communication in writing to the Commission immediately, and in no case later than five business days after the communication occurs.
Package Bidding
The FCC concluded that package bidding with respect to licenses in the Upper 700 MHz Band Block C would reduce the exposure problem (i.e., a problem faced with individual bidding - a bidder is “exposed” to the risk of winning a few licenses it wants in an area without winning other, complementary licenses within the same area) that might otherwise inhibit bidders seeking to create a nationwide footprint. The FCC directed the Wireless Bureau to propose and implement detailed package bidding procedures for the auction of the Upper 700 MHz Block C licenses to facilitate the entry of a new nationwide competitor in that block, and to adopt procedures for the auction of licenses in other 700 MHz spectrum blocks without the use of package bidding.
Bidding Credits
The FCC declined to adopt a “new entrant” bidding credit for 700 MHz Band licenses. However, the FCC previously determined that a 15% bidding credit will be available for small businesses (under $40 million annual revenues), and a 25% bidding credit will be available for very small businesses (under $25 million annual revenues). Included in the revenue count are the revenues of affiliates, controlling interest holders, directors, officers and entities with attributable material relationships. An attributable material relationship exists when more than 50% of the spectrum capacity of any license is leased to one or more entities. Revenues of non-controlling passive investors may be excluded. In the Second Report and Order, the FCC reaffirmed that the small and very small business bidding credits will apply to Upper 700 MHz Block D, even though it is being auctioned as a nationwide license.
There are a number of nuances to the designated entity rules, and to take advantage of the bidding credits, a bidder must qualify as a small or very small business at the time it files its short form application. Any shortcomings cannot later be cured by amendment. As a result, structuring a bidding entity to qualify as a designated entity requires careful legal attention.
Bingham’s attorneys have been active in wireless auction and licensing issues since the FCC began using auctions in 1994. We have advised numerous bidders, investors and lenders on how to best take advantage of the opportunities provided by the FCC’s rules, and we are prepared to assist you with your 700 MHz auction planning.
If you have questions or would like more information, please contact the following lawyers in our Telecommunications, Media & Technology Group:
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