[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
THE SETTLEMENT BETWEEN THE U.S. GOVERNMENT AND NEXTWAVE TELECOM INC. TO
RESOLVE DISPUTED SPECTRUM LICENSES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON TELECOMMUNICATIONS AND THE INTERNET
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
DECEMBER 11, 2001
__________
Serial No. 107-78
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
_______
U.S. GOVERNMENT PRINTING OFFICE
77-117 WASHINGTON : 2002
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
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COMMITTEE ON ENERGY AND COMMERCE
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma BART GORDON, Tennessee
RICHARD BURR, North Carolina PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia BART STUPAK, Michigan
BARBARA CUBIN, Wyoming ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois TOM SAWYER, Ohio
HEATHER WILSON, New Mexico ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING, Mississippi KAREN McCARTHY, Missouri
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri DIANA DeGETTE, Colorado
TOM DAVIS, Virginia THOMAS M. BARRETT, Wisconsin
ED BRYANT, Tennessee BILL LUTHER, Minnesota
ROBERT L. EHRLICH, Jr., Maryland LOIS CAPPS, California
STEVE BUYER, Indiana MICHAEL F. DOYLE, Pennsylvania
GEORGE RADANOVICH, California CHRISTOPHER JOHN, Louisiana
CHARLES F. BASS, New Hampshire JANE HARMAN, California
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
David V. Marventano, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Telecommunications and the Internet
FRED UPTON, Michigan, Chairman
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas BART GORDON, Tennessee
CLIFF STEARNS, Florida BOBBY L. RUSH, Illinois
Vice Chairman ANNA G. ESHOO, California
PAUL E. GILLMOR, Ohio ELIOT L. ENGEL, New York
CHRISTOPHER COX, California GENE GREEN, Texas
NATHAN DEAL, Georgia KAREN McCARTHY, Missouri
STEVE LARGENT, Oklahoma BILL LUTHER, Minnesota
BARBARA CUBIN, Wyoming BART STUPAK, Michigan
JOHN SHIMKUS, Illinois DIANA DeGETTE, Colorado
HEATHER WILSON, New Mexico JANE HARMAN, California
CHARLES ``CHIP'' PICKERING, Mississippi RICK BOUCHER, Virginia
VITO FOSSELLA, New York SHERROD BROWN, Ohio
TOM DAVIS, Virginia TOM SAWYER, Ohio
ROY BLUNT, Missouri JOHN D. DINGELL, Michigan,
ROBERT L. EHRLICH, Jr., Maryland (Ex Officio)
LEE TERRY, Nebraska
W.J. ``BILLY'' TAUZIN, Louisiana
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Cassou, Frank A., Executive Vice-President and General
Counsel, NextWave Telecom, Inc............................. 53
Hunt, Joseph H., Counsel to the Deputy Attorney General,
United States Department of Justice........................ 20
Powell, Hon. Michael K., Chairman, Federal Communications
Commission................................................. 12
Strigl, Dennis, Chief Executive Officer, Verizon Wireless.... 48
Winston, James L., Corporate Secretary, Urban Communicators.. 60
(iii)
THE SETTLEMENT BETWEEN THE U.S. GOVERNMENT AND NEXTWAVE TELECOM INC. TO
RESOLVE DISPUTED SPECTRUM LICENSES
----------
TUESDAY, DECEMBER 11, 2001
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Telecommunications
and the Internet,
Washington, DC.
The subcommittee met, pursuant to notice, at 3 p.m., in
room 2123, Rayburn House Office Building, Hon. Fred Upton
(chairman) presiding.
Members present: Representatives Upton, Stearns, Shimkus,
Ehrlich, Tauzin (ex officio), Markey, Gordon, Engel, Green,
DeGette, Boucher, and Dingell (ex officio).
Staff present: Howard Waltzman, majority counsel; Yong
Choe, legislative clerk; Andy Levin, minority counsel; and
Courtney Johnson, legislative clerk.
Mr. Upton. Good afternoon everyone. The House itself does
not expect any votes until 6:30. So, a number of members are
coming back from their Districts, and I would entertain a
motion now to ask for unanimous consent that all members of the
subcommittee have an opportunity to include their opening
statement as part of the record. And without objection, so
ordered.
Good afternoon. Why are we here today? In part because
Congress is being asked to help clean up a judicial train wreck
between bankruptcy policy and spectrum policy.
Among other things, the train wreck has resulted in very
valuable and scarce spectrum going unused for over 4 years, and
the taxpayers have been starved out of the proceeds which
either of the options of this spectrum should have yielded
them.
The D.C. Circuit Court says that bankruptcy law trumps all
else, and thus the NextWave is entitled to keep its licenses
while the subsequent action, Auction 35 winners, are out of
luck.
The Court's decision motivated the FCC, the Department of
Justice, and the Auction 35 winners, to settle this dispute
with NextWave in order to get the spectrum into productive use.
Congress is now being asked to facilitate the settlement before
the end of the month.
Let me say at the outset that I am not happy about this,
and about the way that this has all shaken out. I am not happy
that NextWave gets $6 billion out of this, and ``b'' as in big,
when it promised to pay $4.5 billion in the C-block auction,
and thus far has only made $500 million in payments.
I am not happy with the way the D.C. Circuit came down on
this matter either. But the alternative would be to ignore the
settlement, and roll the dice, and hurry up and wait, and hope
that the Supreme Court not only takes the case, but also
overturns the D.C. Circuit.
So while it may not be pretty or handsome, the settlement
is the best looking option that we have if we want to get the
spectrum into productive use and improve our physical
situation, because under the terms of the settlement the
government will get $10 billion in a lump sum.
Above all, we need to draw lessons from how we got into
this morass and recognize what I once heard the distinguished
ranking member of the full committee, Mr. Dingell, once say,
there is no education, no value, in the second kick of a mule.
So I am planning to introduce legislation which would
prevent a similar judicial train wreck between the bankruptcy
laws and the spectrum policy laws from ever happening again.
Spectrum is too valuable of a national resource to let it lay
fallow or the lawyers argue ad nauseam in court.
And with that, that concludes my opening statement, and I
will yield to my friend and colleague, the ranking member of
the subcommittee, Mr. Markey. Perfect timing.
Mr. Markey. I thank you, Mr. Chairman, although I would say
that being introduced with the words ``ad nauseam'' immediately
preceding my name is not exactly--but I am sure that it
reflects a certain percentage of attitudes about me.
I thank you, Mr. Chairman, for having this hearing, and
this is an important subject for us because it basically
captures the intersection of budget policy and
telecommunications policy as they collide.
The chief reasons that supporters give for endorsing the
settlement are as follows. Number 1, it ends the legal
wrangling. Number 2, it puts the spectrum in the market. Number
3, it gives the government a financial boost of some $10
billion.
And, Number 4, it is better than any alternative, and so
let me take each of these in-turn. First, the legal wrangling.
I think a quick glance at the settlement document would
indicate to anyone that the lawyers have approached the job of
eliminating legal claims on the licenses, and limiting
corporate liability in future lawsuits with particular
industriousness.
In fact, they have in all likelihood lawyered themselves
out of time. If we are truly interested in ending legal
wrangling, however, Congress should consider changes to the
settlement.
The brokered agreement still does not address what was
ostensibly the root cause of all of the litigation in the first
place. Namely, the authority of the FCC to cancel licenses, and
extricate them from companies in default. That question still
goes unresolved.
Second, Congress should assess whether similarly situated
companies should be part of the settlement, either as a matter
of assuring legal finality, or as a matter of equity in public
policymaking.
There are similarly situated companies out there with
similar claims still waiting a resolution, perhaps by this
subcommittee, on an ongoing basis, not the role in my opinion
for the Congress.
Second, putting the spectrum put in the market. It is hard
not to approach this argument without engaging in I told you to
rhetoric. One wonders why this argument was not persuasive to
the Commission in 1997, 1998, 1999, or 2000, when in that year
NextWave agreed to pay everything that it owed, plus interest,
along with an offer to provide special services in schools in
their markets.
Suffice it to say that we have waited 5 years to get the
spectrum in the market, and whether it happens now or in a few
months from now, is less important in my view than how it comes
into the market.
Third, is the fiscal policy argument, that the government
stands to gain $10 billion. In the alchemy of Federal budget
scoring, this number is totally illusory. This is another
reason why I felt it wholly inappropriate from an institutional
perspective for the FCC to become a fiscal policy advocate back
to Congress, and its own oversight committee.
The Commission should leave cooking the books on spectrum
revenues and budget scoring to OMB. That's their job, and they
are experts at it. Instead, it should root itself in fulfilling
its statutory directives from Congress on these matters.
The fact is that C-Block revenue has already been accounted
for in previous and in current budgets. You can't tell so-
called money the roughly $500 million NextWave deposit. That
was booked and counted some years ago.
With respect to the rest of the money, OMB and CBO have
been counting on all or part of it for years. As a matter of
Congressional fiscal implications, the Congressional Budget
Office already had an estimate for C-Block revenues this year.
The CBO reached this number by splitting the difference on
the relative outcomes if the government won its case or lost
its case. In other words, if the government won, it would get
the $16 billion from the bidders in Auction 35. If it lost, it
would get approximately $6 billion from NextWave in principal,
plus interest, and penalty payments.
Splitting the difference, the CBO estimated C-Block revenue
at $11 billion. Now, if we take the proposed settlement, with
its $16 billion payment from the companies, and then subtract
the $9.55 billion appropriation that Congress must make for
NextWave's portion, that leaves a net gain of $6.45 billion.
And compare that with the $11 billion that was already in
Congressional budget estimates, and we arrive at a net
shortfall of about $4.5 billion. So what is the fiscal
implication of this settlement? Not a $10 billion gain at all.
The cold truth is that if a settlement were introduced as
is, and brought to the House floor, the CBO would score the
bill as costing the government $4.5 billion. We can quibble
about whether we believe this is an accurate representation of
income and outlay, but that is the way the government counts
it.
Which brings us to the final argument, which is that this
settlement may be unpalatable, but the alternatives are worse.
One of the most troubling things about this settlement to me is
that it represents the abandonment of any pretense of sound
telecommunications policy in favor of a financial settlement,
where the FCC intervenes to broker an agreement between
potential licensees and where the overriding objective is
seemingly about getting more money.
A more suitable alternative might be one that better meets
the objectives of Congressionally developed spectrum policy as
articulated in Section 309(j) of the Telecommunications Act.
Advocates for the deal have mentioned getting the spectrum
into the market and recouping a portion of its value for the
taxpayer. Yet, the statute also includes an equally important
number of other goals, the promotion of economic opportunity
and competition, the wide distribution of licenses and
avoidance of excessive concentration of licenses, as well as
the admonishment to avoid unjust enrichment in the methods
employed to award uses of the resources.
When you consider all of the statutory telecommunications
policy objectives, of which Auction revenue is but one, it
becomes clear that while the corporate interest is well
represented in the agreement, the public interest has not yet
been fully served.
Congress would do well to further examine this settlement
with more time next year. At that time, we could address issues
more comprehensively, and also confront the lingering tension
between communications law and bankruptcy law.
Otherwise, Congress may have to act on every failed
enterprise holding spectrum licenses into the foreseeable
future. Mr. Chairman, I thank you, and you have indulged me
with extra time in the opening statement. I yield back.
Mr. Upton. Thank you. Mr. Shimkus.
Mr. Shimkus. Thank you, Mr. Chairman. And I, too, look
forward to this hearing. This is a mess that we are trying to
work our way through. A company, who puts up in essence a
minimum investment, declares bankruptcy, and gets a fairly good
rate of return on that amount of the investment that they went
bankrupt on.
Spectrum does have value, which we currently have a buyer
willing to pay for, and there is the argument of the time value
of money and the time value of resources. There is a need in
our society, especially in this era, to create economic
activity and job growth, and so there is another list to be
added of the possible benefits.
And in this downturn of the economy, if there is a way to
use spectrum more rapidly and help create jobs, that is a
benefit. So we have a lot to sort out here. I look forward to--
I guess we are going to have two panels, and I look forward to
hearing from the first, and then the second, as we try to
address this issue, and I yield back my time, Mr. Chairman.
Mr. Upton. Thank you. The gentleman from Virginia, Mr.
Boucher.
Mr. Boucher. Thank you very much, Mr. Chairman. I want to
welcome our witnesses this afternoon. In my view, Mr. Chairman,
the NextWave settlement is broadly in the public interest, and
I urge the committee to take such steps as may be necessary to
give it full force and effect.
The settlement serves the public interest in a number of
ways. First, the government benefits. The U.S. Treasury will
receive $10 billion, and that is fully $5 billion more than the
government would have received based upon the initial price in
the NextWave auction.
So had it not been for the NextWave bankruptcy, and
succeeding events, the government would have received $5
billion less than it receives in the settlement. I would also
note that if the agreement does not go into effect, the
government faces a risk of having to return to the winning
bidders in the re-auction $3.17 billion in downpayments which
the government is presently holding.
Second, the settlement benefits consumers of wireless
services. The spectrum, which is the subject of this
settlement, is currently unused. Upon approval of the
settlement, this valuable spectrum can be put to immediate use
to improve existing wireless services, and to hasten the
arrival of advanced wireless services for voice, video, and
data.
There is presently an acute spectrum shortage, and an
increased demand for wireless services. The freeing up of this
new spectrum is eagerly awaited in order to benefit consumers
and to satisfy this growing demand.
Third, from the standpoint of the companies which purchased
the spectrum in the reauction, the settlement resolves all of
the legal issues and permits them to proceed with their
business plans.
The winning bidders in the re-auction have paid for the
right to use the spectrum, and have a reasonable expectation of
being able to use it. These 21 companies bid a total of $15.85
billion for the NextWave spectrum, and were required to deposit
20 percent of their winning bid amounts as downpayments at the
time that their bids were accepted.
And that was a total of $3.17 billion. That money is
currently on deposit with the Federal Government, and the
carriers are receiving no interest on the $3.17 billion of
their funds that the government is presently holding.
The carriers that were successful in the re-auction also
reflect on their balance sheets a contingent liability for the
remaining 80 percent of the auction price, which they will be
committed to pay assuming that the auction is confirmed.
This financial overhang from the re-auction substantially
hinders the ability of these wireless carriers to build out
their networks, to improve service quality and to invest in
other promising opportunities. The settlement resolves all of
these concerns as well.
And, fourth, putting the spectrum into immediate use would
provide an economic stimulus as carriers invest billions of
dollars on the infrastructure necessary to offer wireless
services.
I will be interested to learn from our witnesses this
afternoon the magnitude of the anticipated expenditure that
would be required for this buildout in the event that the
settlement is approved.
Mr. Chairman, I think that the committee should take
immediate steps to ensure that the settlement becomes
effective. While some may wish that certain aspects of the
NextWave bankruptcy and subsequent events would have proceeded
differently, in today's circumstance the settlement represents
the best opportunity to conclude this unfortunate chapter and
realize for the various parties the benefits that I mentioned
earlier. Thank you, Mr. Chairman. I look forward to today's
witnesses.
Mr. Upton. I yield to the chairman of the full committee,
the gentleman from Louisiana, Mr. Tauzin.
Chairman Tauzin. Thank you, Mr. Chairman. I want to thank
you for holding this hearing today, and I particularly want to
thank Chairman Powell for joining us, and for assisting us
through this hopefully process where we can conclude with what
has been an unnecessarily contentious and drawn out issue.
For years, and as you know, Mr. Chairman, I have urged the
former Chairman of the FCC to respect the fact that NextWave
had a property right in this spectrum, and that having bid
through the process by which these licenses were distributed,
and having bid properly and then having been in bankruptcy
court trying to work out their financial problems, that the FCC
had no authority to relicense or to reauction these licenses.
Nevertheless, the FCC determined to proceed with Auction 35
and eventually the D.C. Court concluded as I thought they would
that NextWave had a property right here. The FCC, nor any
Federal Agency, could not simply cancel or take it away.
So, here we are.
We are in a situation where after all of these many, many,
months, when in prior months and prior years the FCC could
possibly have settled this in a way that respected the property
rights of the parties, and at the same time put the spectrum to
good use and perhaps collected the money that the government
was owed, we are now at a point in time when we have another
opportunity to do all those things in a settlement.
I agree with you that this is not the prettiest nor the
cleanest necessarily way, or the easiest way to resolve all
these difficult issues, but it does put them all to rest. Mr.
Boucher has put his finger on it. This gets the spectrum out
for the American public to enjoy.
This satisfies the government's obligation to collect its
money and to plug a hole in a budget which needs to be plugged.
And at the same time respects the property rights of the
parties, which the D.C. Circuit Court has recognized.
I think it is a win, win, win, and it puts to rest again--
and not necessarily the prettiest or easiest way--issues that
should have been put to rest a long time ago. And I agree with
you, Mr. Boucher, this settlement ought to be approved as
rapidly as we can approve it, in whatever manner that we can
approve it, and as quick as we can get it done.
And I want to commend the Chairman of the FCC for his
efforts in encouraging this settlement and for what I hope will
be his strong support for Congress endorsing it and putting it
behind us.
The sooner we can get this spectrum working for Americans,
and settle these financial issues for the government and the
parties, and for their property rights, the sooner we can put
this ugly saga behind us.
The bottom line is this spectrum has laid fallow for too
long, and wireless carriers indeed suffer right now from a
dearth of available spectrum. The American public is
desperately in need of these new services frankly, and the
sooner we can get it out the better.
And I think that anyone who holds this up now is playing
the same kind of politics that have held it up for too doggone
long. And we ought to put it to rest rapidly, and we ought to
approve this settlement, Mr. Chairman, any way we can. Thank
you, Mr. Chairman.
Mr. Upton. Thank you. The gentlemen from Tennessee, Mr.
Gordon.
Mr. Gordon. Thank you, Mr. Chairman. I think the issues
have been well-outlined, and I am ready to hear the witnesses.
Mr. Upton. Mr. Stearns.
Mr. Stearns. Mr. Chairman, thank you. Joshua Hammond wrote
a book called, The Servant Culture Forces to Define Who
Americans Are, and it is sort of interesting that the first one
was choice, but the second or the fifth one was ready, fire,
aim.
And we as Americans go out and do things, and then we come
back later and try to adjust and fix it. Now, Mr. Chairman,
what we see here obviously is an awful spectrum car pile up on
the telecommunications highway to say the least.
As a result valuable spectrum other wireless carriers need
lay smoldering on the side of the road as this morass of
litigation remains to be resolved. Now, none of us I think in
this room--and I could be wrong--has actually read the ruling
from the Appeals Court, which the FCC is--that said that they
erred in repossessing the license.
And we probably haven't read the District Court case either
that ordered the licenses returned to the FCC. But thee is
something very simple here. NextWave put a deposit down on a
spectrum of $500 million, which was a very small amount of the
$4.7 billion bid.
So now if I put a small amount down on an automobile, I
guess I own this car, and then you go out and repossess it, and
when you go to repossess it, do you have to pay me a lot more
money for that car when I only put a small downpayment?
Now, what Mr. Boucher says is true, there is a lot of
mitigating things here that the government ultimately is going
to get more money back than if they just sit here and try to do
this on a little sense, and I have made this problem very
simple.
But I think we are at the point now that there is people on
this side of the House, and I sort of agree with the chairman
and also Mr. Boucher, that this is probably a way out of this.
Mr. Chairman, I understand that you will probably have
legislation next year to make sure that his smoldering pile-up
on the highway doesn't occur.
And that is going to be cast net year, but there is people
in the Senate who don't agree with what we are saying here, and
they think that something should be done, because when you look
at it from the outside as a taxpayer, there is a net here that
they don't see, but ultimately the government is going to
benefit.
So I just stand here as someone who--again, the members
have so much on their plate that we don't have the opportunity
to read the appeals decision that ruled the FCC erred in
repossessing the licenses and the whole idea of this.
So we have to go with what appears to be a reasonable
settlement to the best of the benefit for the government. And
so, Mr. Chairman, I think the burden now rests on the
government, and particularly the FCC and the Department of
Justice, to demonstrate that this settlement is in the public
interest.
Because we don't have all the details, and we can work on
just what we see as the outside. But we have a morass of
litigation that has to be resolved, and as many members pointed
out, this might be a solution that is palatable, but not fully
understandable. And I yield back, Mr. Chairman.
Mr. Upton. Thank you. I recognize the ranking member of the
committee, Mr. Dingell, from the great State of Michigan.
Mr. Dingell. It is a great State, Mr. Chairman, as you have
so wisely said. Thank you, Mr. Chairman, for holding this
hearing, and my thanks to the witnesses for appearing.
The matter that we are addressing today is a highly complex
one. Its roots go back many years, with much work by both the
Federal Communications Commission, this committee, and other
agencies of government.
The FCC's past work on this matter has been significantly
less than stellar. While the matter is complex, it is with the
proper asking of questions reducible to I think an
understandable whole, one in which we may come to intelligent
judgments as to what should be done, and where it is that the
public interest lies.
And as this hearing goes forward, I will be asking some
questions to try and figure out whether this matter is in the
public interest. I noted with interest the comments of my
friend, Mr. Stearns, and I want to commend him. This is
something which does need to be resolved.
But we want to make sure that this matter is resolved on
terms which are acceptable to the public, and which are
consistent with the public interest. We are faced now with a
dilemma of how to proceed from here. I hope that we can make a
rational and a deliberate judgment as to the proper course.
Again, I repeat that those things will be greatly assisted
by the proper questions being asked and the proper questions
being answered. The judgment must be made I would note with
full possession of all the facts, taking into consideration
relevant matters of telecommunications law and policy within
this committee's jurisdiction.
Understandably, the parties have a desire to expedite this
process, and I think I can say that I do not quarrel with their
desire. To that end, I would note that Mr. Markey and I wrote
the Commission late last week. We asked for some information in
preparation for today's hearings, and Chairman Powell, I want
to express my thanks to you and to your staff for the timely
response. I know that it was no small task, and I want you to
know that I appreciate your courtesy, and the completeness with
which you responded.
Although the letter to Chairman Powell was responded to,
and its answer was responsive to our questions, I am still
concerned that the Commission may yet be lacking critical
information necessary to make an informed judgment on how that
agency should proceed.
And, of course, we look to the Commission to advise us so
that we may make the necessary and proper judgments. And as
tempting as it may be to legislate a quick fix, I would note
that it may very well be unwise to do so under the
circumstances before us, and with the amount of knowledge and
understanding which we now possess.
The Congress is being asked, and we have to be very clear
on this, to authorize and appropriate $6 billion to a private
party, and I am satisfied that there is not a single soul in
this room that wouldn't love to have Congress appropriate $6
billion to and for them.
This is, however, I would note, an unprecedented exercise
in my experience. Moreover, to legislate such a thing at
lighting speed without a full and thoughtful investigation of
whether the facts and circumstances warrant such remarkable
treatment is indeed hasty and very truthfully ill-advised.
Do we know precisely who will be receiving this windfall?
NextWave, like many companies emerging from bankruptcy, may not
be the same company it was when it was first issued the
licenses that are in question.
Indeed, it may be a totally different company. Its finances
have been substantially restructured, and we have no assurances
from the Commission that the company in fact continues to be a
qualified license holder under the Commission's designated
entity rules.
We are not really sure we even know who the shareholders or
officers are. In fact, these questions about NextWave's
qualifications have been raised before the Commission at
various times by various parties.
But the agency has yet to determine whether or not those
claims and those matters have merit. We are being asked now as
a legislative body to disregard whether NextWave currently has
a legal right to hold these licenses, and to codify a
settlement that would dismiss these claims and deliver 6
billion cash U.S. dollars.
The parties are also asking us to abandon two key statutory
mandates and perhaps more contained in the Commission's auction
authority. One is the basic principle that expressly forbids
the FCC from considering potential revenues generated from
competitive bidding in making spectrum policy decisions.
Yet, that is precisely the driver of the recommendations
being made here today. This committee has consistently and
steadfastly objected in the past on a bipartisan basis when the
Budget Committee has insisted on abandoning these core
principles, which they have done not infrequently, and often to
their great distress and sorrow. And add to that of others of
us here, too.
We are also being asked to ignore the statutory mandate
that small businesses, rural telephone companies, women-owned
companies, be afforded an opportunity to compete in the
broadcast PCS market along with the bigger players.
Press reports indicate that most of the NextWave licenses
will be consolidated among Verizon, Cingular, a partnership of
SBC and Bell South, and AT&T. Now that would appear to be
clearly inconsistent with the intentions that the Congress and
this committee have expressed in the legislative pronouncements
we have made when the FCC's auction authority was established.
Mr. Chairman, I appreciate the hard work that has been done
by the Commission, and I commend you for having these hearings.
I think we have got to look at this very carefully, because if
we don't, we might find that we have made a prodigious mistake,
and we will have created quite a stink. I thank you.
Mr. Upton. Thank you. The gentleman from Maryland, Mr.
Ehrlich.
Mr. Ehrlich. Thank you, Mr. Chairman. Chairman Powell, it
is good to see you. I always enjoy your testimony and I do
apologize in advance for having to leave in a few minutes.
So I guess it is a little bit of a fairly unusual opening
statement here. This is indeed a complex issue, and I want to
make some observations I guess in the form of some questions,
which I am sure that you will attend to in any event.
But from my opening statement, I would like to leave some
particular inquiries with you for your consideration. Mr.
Chairman, let's say that Congress does not do a deal this year.
What would be the effect on our goal to get spectrum in use,
and get investment rolling, and get new services in place?
Are we talking about a month delay, 2 months, 5 months,
whatever? There is some speculation from the press, as you
know, that we don't need legislation at all. Why can't the FCC
settle this litigation, or settle this without any litigation?
Third, there has been some discussion that NextWave or
other companies have gained themselves to enrich themselves. In
these negotiations did NextWave or the other companies in
Auction 35 gain the system?
Fourth, and last, there is a quote from a news service of
December 6 attributed to you. ``I personally think getting $10
billion today that I can put in the bank for that spectrum,
versus the roughly $5 billion that I might be able to get from
NextWave over a 10 year installment period was fiscally
better.''
Mr. Chairman, is that an accurate quote? If so, would you
explain the logic behind it. What would happen if the Supreme
Court denied cert after the strong decision at the D.C. Circuit
Court level, would NextWave keep the license, and what would
the government get?
I suspect, Mr. Chairman, that your testimony will answer
many of these questions in the course of it, and I appreciate
your consideration, and I yield back.
Mr. Upton. Thank you. Mr. Green.
Mr. Green. Thank you, Mr. Chairman. I want to thank you for
holding this important hearing because of the timeliness of it,
I think, and I want to begin by saying that like my colleagues,
I am not comfortable with the NextWave settlement, and I am not
necessarily opposed to it maybe like my colleague from Florida,
Mr. Stearns.
I don't know our options, but I can't get over the feeling
that the American consumer loses, no matter what we do in
trying to resolve this issue, and I also can't get over the
fact that NextWave may be gaming the system, and hurting our
consumers.
I have never heard NextWave express their disappointment
that they would not be billing their advanced third generation
wireless network. Mostly, I have heard about the need for a
financial settlement for the NextWave investors and a
reallocation of the spectrum to the wireless industry.
And what about my constituents who don't own a cell phone,
and are thus deprived of their benefit for the deal through the
financial settlement. They are getting a lot less than the $15
plus billion on Auction 35.
The $10 billion that they will receive is no small sum, but
it still is less than was promised. And what if, Mr. Chairman,
this deal doesn't go through by December 31? What will happen?
In reading Chairman Powell's testimony, he certainly paints
a glooming picture of our legal right to NextWave's spectrum.
However, if Congress is not able to reach a deal for the
industry imposed deadline, are there no other options to
reclaim the American people's spectrum, and that is the bottom
line. It is the American people's spectrum.
For instance, I was told that there are several petitions
sitting down at the FCC seeking to challenge the designated
entity status of NextWave. If this settlement falls through, is
the Commission going to act on these petitions.
And in addition, I hope, Chairman Powell will expand on
this during the questioning, on when did the clock start
ticking for the NextWave to meet their build out requirements.
Finally, Mr. Chairman, I want to know what steps the FCC
has taken to ensure that this doesn't happen again, and if
necessary, if we need to change the law in Congress on
tightening the auction rules as we go forward, what else can be
done.
In closing, like I think all of us, particularly from
Houston, I understand that we are on the Board of Directors of
a corporation called The U.S. Government. And we have a
judiciary relationship to the American people, who deserve the
best deal possible for our stockholders, or our constituents.
And I am not fully convinced that this is the best deal,
and I yield back my time.
Mr. Upton. Thank you. Ms. DeGette.
Ms. DeGette. Mr. Chairman, like everyone else here, I am
eager to hear the testimony, and to hear the rationale for this
settlement, and so I don't want to delay the proceedings any
further, and I will submit my opening statement for the record.
Mr. Upton. Thank you. Mr. Engel.
Mr. Engel. Thank you, Mr. Chairman. Thank you for calling
this hearing on the NextWave settlement. This is quite frankly
a cantankerous problem that was irritated more by numerous bad
decisions in the past. Let me be clear that I truly believe
that the FCC made a mistake when it recalled and reauctioned
spectrum licenses prior to a final determination of the court's
regarding NextWave's legal standing under bankruptcy.
I understand the desire to put this spectrum to use, but I
also am very concerned about any company or individuals rights
to the legal protections of bankruptcy. As a result of the
FCC's decision, numerous other parties were drawn into the
mess.
Other wireless companies, such as Verizon, participated in
the reauction. Now, this was a tedious business decision, and
they were aware of the pending litigation, but the business
opportunity to expand their wireless networks could not be
ignored.
In the end, these other companies made the choice that not
participating was a greater risk than participating. Some areas
of the country, such as New York City where I am from, are
experiencing rapid growth in cell phone use. These licenses are
vital to continued growth and good service in New York City.
Existing spectrum that is already in use is almost at
maximum capacity. Thus, unused spectrum, such as that in
NextWave's control, is just wasteful. That having been said, I
find myself impressed with the settlement before us, and
considering the numerous legal difficulties, multiple court
challenges, and other things, this legal deal extricates us
from one of the most complex legal quagmires I have ever
witnessed in a very, very long time.
It is evident that a great deal of hard work and thought
went into this. Recently, it has come to my attention that
there is now an outstanding question as to whether or not
NextWave is legally entitled to hold the licenses.
It has been suggested that NextWave may not qualify as its
foreign ownership exceeds legal caps. However, instead of
junking this whole deal, I would suggest that an escrow account
be set up pending this determination.
I hope that when Congress acts that it includes all
companies that bid on spectrum licenses and then went into
bankruptcy. Those other companies particular situations may not
have been appropriate for the negotiation table with NextWave,
but I believe the FCC should be pursuing agreements with them
so that Congress can enact one bill to handle all of this.
I would also like to note that the problems that we are
seeking to solve today are the results of the previous FCC
Chairman's decisions. Chairman Powell has worked hard on this
settlement. However, in his written statement, he advises
Congress to alter existing bankruptcy law to prevent future
situations like this one before us.
Instead, I believe that this subcommittee should be dealing
with issues under its jurisdiction. We should be determining if
the FCC needs to strengthen its financial reviews of bidders,
or if legislation is needed to strengthen the FCC's authority
in this area.
I would hope that the Chairman is also able to discuss what
the FCC has done on its own to prevent this from happening
again, and I look forward to his testimony, and I think that
this will be a very fascinating hearing, and I thank you.
Mr. Upton. Thank you. That concludes opening statements. We
are going to have two panels this afternoon. The first panel
will be headed by the Chairman of the Federal Communications
Commission, the Honorable Michael K. Powell, along with Mr.
Joseph H. Hunt, Counsel to the Deputy Attorney General at the
Department of Justice. Gentleman, welcome.
Your statements are made a part of the record in their
entirety, and if you could take about 5 minutes to sum things
up, and we will start questions after that.
Mr. Chairman, go ahead.
STATEMENTS OF HON. MICHAEL K. POWELL, CHAIRMAN, FEDERAL
COMMUNICATIONS COMMISSION; AND JOSEPH H. HUNT, COUNSEL TO THE
DEPUTY ATTORNEY GENERAL, UNITED STATES DEPARTMENT OF JUSTICE
Mr. Powell. Let me say at the outset that listening to the
various opinions expressed during the opening comments, I can
assure you that over the 6 month drawn out, tortuous
negotiations, I have shared every single sentiment that I have
heard here at one point or the other in the process.
I am pleased and honored to have the opportunity to sit
before you today and at least explain why I reached my
professional opinion that on the public interest merits of the
NextWave settlement, the American consumer does benefit.
As I say in my testimony, I think sometimes in the morass
of details that it might be important to just keep three simple
questions at the forefront of your deliberation.
First, it is important to consider what posture the
government is actually in, as opposed to where one wishes we
stood.
If I had to do it over again, I personally would love to be
in a different posture than that held by the D.C. Circuit, but
under that ruling, and the mandate that was issued, NextWave
has rightful claim to its licenses, and the Commission's
reauction, with its glittering bids of $16 billion has been
largely arguably nullified.
The second question, given these circumstances, regrettable
though they may be, we must ask does this settlement
nonetheless salvage substantial benefits for the American
taxpayer.
The government concluded that it does, putting the licenses
to work in recovering two-thirds of the proceeds it would have
received had Auction 35 not been undermined by the court
ruling.
Third, even if the settlement is bitter to swallow, as I
believe it is, we have to ask ourselves is there a better
alternative. The government concluded that the only other
alternative posed greater risks to the public's interests than
did the settlement.
And in my testimony today, I would like to elaborate on
these points. I will only briefly note that Chairman Upton and
Mr. Markey are correct--that this settlement does not solve the
basic problem, which the Commission as always been concerned
about--the clarity necessary to reconcile potentially
conflicting legal regimes between bankruptcy and
telecommunications policy.
No matter what one's position, we know at least now that
the process of auctioning spectrum has a vulnerability
associated with it, and at least we need to go forward with
auctions understanding that that continues to be a risk.
I won't elaborately discuss the posture of the case, but it
is important to note that after this long and tortuous history
that it did arrived before the United States Court of Appeals
for the D.C. Circuit.
That court held unequivocally that the Commission acted
unlawfully when it tried to automatically cancel the licenses
of NextWave, and issued a mandate that required that the
NextWave licenses be in rightful possession of that party, and
we were permitted only to conduct further proceedings not
inconsistent with that ruling.
Given those circumstances, the Department of Justice and
the FCC decided, and indeed at certain critical moments--to
consider the financial implications, and with the White House,
in the form of the OMB, explored possible settlement of the
case.
The government had to find a way to recover the licenses,
distribute them to many companies that had won them at
reauctioning, and to secure as much of the reauction proceeds
as possible.
I assure you that this was no simple task. The talks went
on for many months, and I was personally involved in the
discussions and regularly kept my colleagues informed of the
progress so that they would be prepared if Commission action
was necessary to finalize any agreement.
In the very late stages of the negotiations, thorny legal
issues and questions of uncertainty made it clear that it would
be very difficult to effectuate any settlement without
legislative action.
The parties reached mutually agreeable terms only late in
November, and a proposal was almost immediately forwarded to
Congress by the Attorney General for your consideration. The
settlement agreement requires in its simplest form that the
Auction 35 bidders pay the government nearly $16 billion that
they bid in exchange for receiving the licenses auctioned in
Auction 35.
And to then the government keeps $10 billion in net
proceeds, but by December 31, 2002 will pay NextWave
approximately $5.8 billion in exchange for the complete release
of its legal claims and the disputed licenses.
As you know the settlement agreement is contingent upon the
passage of legislation that includes draft legislation for
Congress to consider. There are several reasons why we
concluded that legislation was necessary to effectuate this
settlement, and Mr. Ehrlich, this might help with some of your
questions.
First, the proposed legislation ensures that Congress has
authorized a settlement, and the movement of funds necessary to
implement it. I would note that the FCC has no checkbook from
which it could pay NextWave to relinquish its licenses.
Moreover, even if the Auction 35 winners paid the
government first, it was unclear legally what they would be
paying for, given the status of the auction, and that the
government had no clear mechanism to turn around and transfer
that money to NextWave.
There simply is no authority resident in the Federal
Communications Commission to draw on the Treasury in that
manner. This Congressional action is required to empower the
government to execute those complex terms.
Finality was a second and critical factor in reaching the
agreement. Both NextWave and Auction 35 winners were unwilling
to participate without confidence that after having reached an
agreement and foregone other opportunities, the agreement would
not be overturned in court.
The proposed legislation attempts to partially address
these issues. It contains judicial review provisions patterned
on other acts of Congress that provide for an expedited review
limited to Constitutional claims.
Any challenge to the legislation in the settlement
agreement itself, or to actions taken by the Commission, would
be funneled into a single Court of Appeals for review. This
provides assurance that the public will receive the benefits of
the settlement with minimal additional litigation delay.
Third, the legislation provides the guarantee necessary for
NextWave to relinquish its claims on the licenses. In return,
NextWave will be paid once the government receives Auction 35
receipts equal to the payments to be made by NextWave by the
end of next year.
Fourth, and finally, I would like to say a word about the
December 31 clause in the settlement agreement. This is not, as
some have maintained, an effort to jam the U.S. Congress into
the agreement.
Congress, of course, remains free to consider the deal as
it sees fit, and modify the terms under its prerogatives. No
private contract can limit the legislative power. The date
merely reflects the fragility of the coalition and its
interests.
The Auction 35 winners need quick resolution in order to
justify to their boards foregone alternatives in order to
finance the purchase and to plan for the future. The bankruptcy
proceeding continues to march forward and the parties each must
maintain their positions there as well.
And as we have noted, the Supreme Court case continues to
move forward. The parties felt that after December 31 they were
unwilling to promise to be a party to a settlement given these
other exigencies.
I merely ask that Congress keep those risks in mind as it
deliberates over the legislation. We do recognize that the
compressed period for analysis and recent discussions makes
this task difficult for you, and for your staffs, and we
appreciate the attention and care that has already been shown
by Congress in considering the settlement in the legislation.
I pledge my own personal assistance and that of my agency
as you work through these difficult issues. Now to the gravamen
of the whole settlement. This settlement is in the public
interest in my judgment.
Given the magnitude of it, in terms of money and its
complexity, it is challenging to sort through the conflicting
claims about its merit. But after a long and substantial
examination, I believe that it is squarely in the public
interest, just as the Attorney General and the White House have
concluded, via OMB as well.
I am convinced because at bottom after all the verbiage,
the settlement satisfies three essential government objectives.
First, it removes the licenses from a bankrupt bidder, and
distributes them to companies that bid in the reauction who can
put them to use almost immediately.
Increasing spectrum in the market will partially help
address the current spectrum shortage, improving quality of
service, and providing capacity for new advanced services, such
as third generation or so-called 3G.
And I believe solidly that these are benefits to the
consumer. Along that route, and aside, these licenses have been
used once, and only once. They were used 3 months ago today on
September 11, when wireless capacity forced a 300 percent
increase in New York City for wireless telephone calls, and the
congestion and complications in public service activity that
resulted have been heavily noted.
Ever since that tragic day the government has worked to try
to provide access systems and other ways for public safety to
take advantage of spectrum. The Federal Communications
Commission issued special temporary authority to companies
operating in New York City to deal with the crisis.
That authority was to use these very NextWave licenses that
had been encumbered for so many years. That is definitely in my
opinion in the public interest. Second, it ends nearly 5 years
of litigation, and it is an important point to note that this
litigation likely would continue for several more years,
leaving the spectrum laying fallow and the Treasury empty.
Third, it gives the taxpayers $10 billion, double the
amount of money that they stand to gain from NextWave, which
would only have to pay $4.3 in installments over a several year
period.
This money flows to the U.S. Government at a time when the
funds are sorely needed. And finally I think you always have to
ask what really are the better alternatives to this settlement.
The main reason to settle is that a settlement is
preferable to the other alternative. If the Commission
continued to litigate, and the Supreme Court declines to take
the case, the decision of the Circuit will stand, of course,
and NextWave likely will be the licensee.
In that scenario, NextWave likely will elect to continue to
pay for the spectrum over time at very advantageous interest
rates pursuant to the installment program. NextWave could pay
for the spectrum over 6 years at a rate of 6.5 percent for C-
Block licenses, and 6.25 for F-Block licenses.
That would leave the Treasury with substantially less than
$10 billion in revenues that would be generated by the
settlement. Even if the Supreme Court grants the government's
petition for certiorari, the Court may not rule in the
government's favor on the merits.
In addition, and importantly, even if the Supreme Court
does rule in favor of the government, it might very well remand
the matter to the District of Columbia Circuit for further
action on several legal issues that remain unsolved in the
panel's decision.
No matter what the outcome, litigation would likely mean
many years of further delay of the Commission's ability to
grant spectrum licenses for much needed wireless services for
American consumers.
I would note that the Commission first auctioned this
spectrum in 1996 and 1997. Yet, it has never been used but that
once. Even a favorable ruling from the high court might not
arrive until late in 2003.
And without a settlement, the valuable spectrum will remain
fallow. Moreover, even if the government ultimately prevails in
all litigation, there is uncertainly about the future value
that bidders would place on the spectrum given fluctuations in
the market.
Several high bidders in Auction 35 have indicated that if a
settlement does not go forward, and there is further
litigation, they should be released from the obligations of
Auction 35, and have their downpayments returned.
They would argue, for example, that they should be entitled
to the full return of the $3.2 billion that was mentioned
earlier. It is uncertain at what price this spectrum would sell
for at the conclusion of litigation.
In conclusion, the Commission and the other parties to the
NextWave case have negotiated long and hard to resolve a matter
of critical importance to the American public. We have
attempted to settle it in a way that protects the public
interest, ensures that spectrum is put to prompt use, and
guarantees that the American people receive fair value for the
spectrum.
I would like to thank the subcommittee for this opportunity
to provide information, and I look forward to answering your
questions, any that you may have. Thank you.
[The prepared statement of Hon. Michael K. Powell follows:]
Prepared Statement of Hon. Michael K. Powell, Chairman, Federal
Communications Commission
i. introduction
Good afternoon, Mr. Chairman and Members of the Subcommittee. I am
pleased to appear before you and offer my professional opinion on the
public interest merits of the NextWave settlement, and the necessity of
legislation to secure those benefits for the American consumer.
As you consider this important matter, and its myriad provisions, I
would respectfully suggest keeping three central points at the
forefront of your deliberations:
First, consider what posture the Government actually is in, as
opposed to where we all with it stood. Under the court ruling, NextWave
has a rightful claim to the licenses, and the Commission's re-auction--
with its glittering bids totaling $16 billion--has been nullified.
Second, given these circumstances (regrettable though they may be),
we must ask if this settlement nonetheless salvages substantial value
for the American taxpayer. The Government concluded that it does,
putting the licenses to work and recovering two-thirds of the proceeds
it would have gotten, had Auction No. 35 not been undermined by the
court ruling.
Third, even if the settlement is slightly bitter to swallow, we
must ask if there is a better alternative. The Government concluded
that the only other alternative posed greater risks to the public's
interest than did the settlement. In my testimony today, I will
elaborate on these conclusions.
And, finally, I respectfully request this Subcommittee and the
Congress consider an important issue related to this case--settling
with NextWave still leaves a gaping loop hole for anyone seeking to
participate in an auction and then avoid the resulting government debt
by declaring bankruptcy. Spectrum belongs to the public, and I believe
that, even if we never provide for installment payments, it is
important for Congress to make clear how spectrum auctions are to be
treated under the U.S. Bankruptcy Code so that these cases never happen
again. Although prospective protection for our auction program is not
in the settlement legislation, now would be a good time to consider
enacting language of this nature in order to provide certainty to all
auction bidders, as well as to protect the auction process.
ii. the posture of the case
In 1993, Congress authorized the FCC to award licenses for spectrum
through a system of ``competitive bidding,'' or auction. In 1996 and
1997, the Commission held initial auctions for C-Block and F-Block
Personal Communications Services (PCS) licenses. At those auctions,
NextWave submitted the winning bid on 63 C-Block licenses and 27 F-
Block licenses for a total of $4.8 billion. NextWave deposited a $500
million down-payment with the U.S. Government and agreed to pay the
balance ($4.3 billion) over ten years at a favorable interest rate.
Each license granted to NextWave by the Commission was conditioned
on NextWave's full and timely payment of all its installments, and the
licenses made clear that failure to make such payment caused their
automatic cancellation. NextWave failed to pay its bid commitments,
instead filing for bankruptcy protection in 1998. NextWave filed to
reduce the value of its bids and later fought against license
cancellation during the course of its reorganization under Chapter 11
of the Bankruptcy Code.
Over the next three years, the Commission, the United States,
NextWave, and others engaged in intensely fought litigation in numerous
courts, including the U.S. Bankruptcy Court, the U.S. Court of Appeals
for the Second Circuit, the U.S. Court of Appeals for the D.C. Circuit,
and the Supreme Court of the United States. The Second Circuit upheld
the Commission's regulatory requirement that there be full and timely
payment by NextWave for the licenses. The Second Circuit also held that
the Commission's decision to automatically cancel the NextWave licenses
and to re-auction the licenses was not contrary to bankruptcy law. The
court did allow that any administrative claims about the FCC's actions
could be raised in the D.C. Circuit. Relying on the Second Circuit
decision, in January 2001, the Commission re-auctioned the spectrum
previously licensed to NextWave. In that re-auction (Auction No. 35),
21 wireless carriers bid $15.85 billion for the new licenses.
Unwilling to yield, NextWave petitioned the D.C. Circuit for review
of the Commission's decision to cancel NextWave's licenses for failure
to pay. On June 22, 2001, the D.C. Circuit ruled that the automatic
cancellation of NextWave's licenses violated Section 525 of the
Bankruptcy Code, concluding that the Second Circuit opinion did not
squarely consider this provision. The gravamen of the D.C. Circuit's
decision was that NextWave was still in possession of the licenses,
raising questions about our having re-auctioned the licenses in Auction
No. 35. The Government has since sought review of this decision in the
Supreme Court. This matter is still pending.
Given these circumstances, the Department of Justice and the FCC
began to explore a possible settlement of the case. The Government had
to find a way to recover the licenses, distribute them to the many
companies that had won them at the re-auction, and secure as much of
the re-auction proceeds as possible. This was no simple task. The talks
went on for many months. I was personally involved in the discussions
and regularly kept my colleagues informed of the progress, so that they
would be prepared if Commission action was necessary to finalize any
agreement. In the late stages of the negotiations thorny legal issues
and questions of uncertainty made it clear that it would be very
difficult to effectuate any settlement without legislative action. The
parties reached a mutually agreeable set of terms in late November, and
a proposal was almost immediately forwarded to Congress by the Attorney
General for your consideration.
The settlement agreement requires that Auction No. 35 bidders pay
the Government the $15.8 billion that they bid in exchange for
receiving the licenses auctioned in Auction No. 35. The Government will
then keep $10 billion in net proceeds and will guarantee by December
31, 2002 to pay $5.8 billion net to NextWave in exchange for its
complete release of all claims to the disputed licenses.
The settlement agreement is contingent upon the passage of
legislation, and it includes draft legislation for Congress to
consider. There are several reasons why this legislation is necessary
to effectuate the settlement.
First, the proposed legislation ensures that Congress has
authorized the settlement and the movement of funds necessary to
implement it. The FCC has no checkbook from which it could pay NextWave
to relinquish its licenses. Moreover, even if the Auction No. 35
winners paid the Government first, it is unclear legally what they
would be paying for (given the status of the auction), and the
Government had no mechanism to turn around and transfer that money to
NextWave. This congressional action is required to empower the
Government to execute the settlement.
Finality was a second and critical factor in reaching agreement.
Both NextWave and the Auction No. 35 winners were unwilling to
participate without confidence that after having reached agreement and
foregone other opportunities, the agreement would not be overturned in
court. The proposed legislation attempts to address these issues. It
contains a judicial review provision, patterned on other Acts of
Congress, that provides for expedited review, limited to constitutional
claims. Any challenge to that legislation, the settlement agreement
itself, or to actions taken by the Commission would be funneled into
one court of appeals (the D.C. Circuit) and would be on a fast track
for review. This provides assurance that the American public will
receive the benefits of the settlement with minimum additional
litigation delay.
Third, the legislation provides the guarantee necessary for
NextWave to relinquish its claims on the licenses. In return, NextWave
will be paid once the Government receives Auction No. 35 receipts equal
to the payments to be made to NextWave but no later than December 31,
2002.
Fourth and finally, I would like to say a word about the December
31, 2001 clause in the settlement agreement. This is not, as some have
maintained, an effort to jam the Congress into agreement. Congress, of
course, remains free to consider the deal as it sees fit, and may
modify the terms under its prerogatives. No private contract can limit
the legislative power. The date merely reflects the fragility of the
coalition and its interests. The Auction No. 35 winners need quick
resolution in order to justify forgone alternatives, finance the
purchase, and plan for the future. The bankruptcy proceeding continues
to march forward and the parties each must take positions there. Also,
the Supreme Court case continues to move forward. The parties felt that
after December 31, 2001, they were unwilling to promise to be a party
to settlement, given other exigencies. I merely ask Congress to keep
those risks in mind as it deliberates over the legislation.
We recognize that the compressed period for analysis and reasoned
discussion makes this task difficult for you and your staff, and we
appreciate the attention and care that has already been shown by
Congress in considering this settlement and legislation.
iii. the settlement proposal is in the public interest
Given the magnitude of this settlement in terms of money and its
complexity, it is challenging to sort through conflicting claims about
its merits. I have concluded after long and substantial examination
that this settlement is squarely in the public interest, as has the
Attorney General and the White House. I am convinced because, at
bottom, the settlement satisfies three essential Government objectives:
First, it removes the licenses from a bankrupt bidder, and
distributes them to companies that bid in the re-auction, who
can put them to use almost immediately. Increasing spectrum in
the market will partially help address the current spectrum
shortage--improving quality of service and providing capacity
for new advanced services, such as Third Generation or so-
called 3G.
Second, it ends nearly five years of litigation that would
likely continue for several more years, leaving the spectrum
fallow and the treasury empty.
Third, it gives the taxpayers $10 billion, double the amount
of money they stand to gain from NextWave ($4.3 billion, paid
in installments over 6 years). This money flows to the U.S.
Government at a time that the funds are sorely needed.
iv. what are the better alternatives to settlement?
The main reason to settle is that settlement is preferable to the
alternatives. If the Commission continues to litigate and the Supreme
Court declines to take the case, the decision of the D.C. Circuit will
stand and NextWave will be the licensee. In that scenario, NextWave
likely would elect to continue to pay for the spectrum over time at
advantageous interest rates. Pursuant to the installment payment
program, NextWave could pay for the spectrum over six years at a rate
of 6.5 percent for C-Block licenses and 6.25 percent for the F-Block
licenses. That would leave the Treasury with substantially less than
the $10 billion in revenues that would be generated by the settlement.
Even if the Supreme Court grants the Government's petition for
certiorari, the Court might not rule in the Government's favor on the
merits. In addition, even if the Supreme Court rules in favor of the
Government, in might remand the matter to the D.C. Circuit for further
action on several legal issues left unresolved in the panel's initial
decision--any of which could result in NextWave remaining the licensee.
No matter what the outcome, litigation would likely mean years of
further delay of the Commission's ability to grant spectrum licenses
for much-needed wireless services for American consumers. The
Commission first auctioned this spectrum in 1996 and 1997, yet the
spectrum has never been used. Even a favorable ruling from High Court
might not arrive until late in 2003. Without a settlement, valuable
spectrum may well remain fallow at a time when our economy and the
consumer need it most.
Moreover, even if the Government ultimately prevailed in all
litigation, there is uncertainty about the future value bidders would
place on the spectrum given fluctuations in the marketplace. Several
high bidders in Auction No. 35 have indicated that if the settlement
does not go forward and there is further litigation, they should be
released from the obligations of Auction No. 35. They would argue, for
example, that they should be entitled to the return of the $3.2 billion
in deposits held in non-interest-bearing accounts by the Government. It
is uncertain at what price this spectrum would sell for at the
conclusion of the litigation.
v. conclusion
The Commission and the other parties to the NextWave case have
negotiated long and hard to resolve a matter of critical importance to
the American public. We have attempted to settle this matter in a way
that protects the public interest, ensures that the spectrum is put to
prompt use, and guarantees that the American people receive fair value
for the spectrum. I would like to thank the Subcommittee for this
opportunity to provide information on the NextWave settlement. I look
forward to answering any questions you may have.
Mr. Upton. Thank you.
Mr. Hunt.
STATEMENT OF JOSEPH H. HUNT
Mr. Hunt. Thank you Chairman Upton and members of the
subcommittee. I appreciate the opportunity to provide a
statement. The government's dispute with NextWave dates back to
1996 and 1997, when the company was the high bidder at auctions
held by the Federal Communications Commission for wireless
telecommunications licenses.
NextWave opted to pay its winning bids, totaling $4.86
billion, in installments, but soon sought bankruptcy
protection. After two trips to the United States Court of
Appeals for the Second Circuit, which ruled for the government
on bankruptcy law issues, the FCC reauctioned the disputed
spectrum earlier this year in FCC Auction Number 35.
Winning bids for that spectrum in Auction 35 totaled $15.85
billion, more than three times the amount that NextWave had
agreed to pay 5 years earlier. NextWave brought an action in
the District of Columbia Circuit challenging the FCC's
reauction of the spectrum.
That court held that Section 525 of the Bankruptcy Code
precluded the FCC's automatic cancellation of NextWave's
licenses. Although the government has petitioned the Supreme
Court for review of that decision, there can be no assurance
that continued litigation will allow the government to put the
spectrum to its most productive use or to recover the $15.8
billion bid at Auction 35. Moreover, even if the government
were ultimately successful in its pursuit of this litigation,
victory could only come after years of additional delay.
Extensive and complex negotiations, lasting more than 2
months, culminated in a settlement agreement signed by the
government, NextWave, and Auction 35 winning bidders
representing more than $15.8 billion in bids. Under the
settlement, NextWave will surrender the licenses in exchange
for guarantee of payment from the United States. The FCC will
then grant licenses to the Auction 35 winning bidders, who will
pay the full amount of their winning bids.
As the Attorney General explained in his letter to the
Congressional leadership, the Department has concluded that the
settlement is strongly in the public interest. It offers two
tangible benefits to the American people.
First, the settlement accomplishes by mutual agreement what
lengthy and contentious litigation has been unable to achieve--
the award of spectrum to telecommunications companies that are
most likely to use it promptly and efficiently, thereby making
possible the expansion and improvement of widely used wireless
telecommunications services.
Second, it will bring substantial additional revenues to
the United States Treasury. The settlement is designed to bring
into the Treasury net payments in excess of $10 billion,
resulting in a net benefit to the budget of approximately $4
billion.
The settlement is a genuine compromise that recognizes the
enormous demand for this spectrum, and recovers for the public
most of the value the spectrum represents to the winning
bidders at Auction 35.
The Attorney General has submitted a draft bill that
provides statutory authority to proceed with the settlement.
The bill provides the guarantee of payment that is required
before NextWave will relinquish its claims to the licenses. It
also specifies that Auction 35 should be implemented, with
payment terms as modified under the settlement agreement.
The bill establishes a limited and expedited structure for
judicial review of challenges to the settlement, which is
designed to ensure that any challenge is resolved by the courts
as quickly as possible. Three kinds of challenges are
permitted--litigation concerning approval of the settlement
under the Bankruptcy Code, constitutional challenges to the
FCC's approval of the settlement, and constitutional challenges
to the implementing legislation.
To ensure that the litigation concludes quickly, thereby
providing the timely access to clean licenses required by the
Auction 35 bidders and timely public access to additional
spectrum, parties will be held to strict guidelines for
initiating judicial proceedings and courts will be called upon
to expedite their review, to the extent practicable.
The settlement requires enactment of legislation before it
can go forward. The Department of Justice strongly urges the
committee, and the Congress as a whole, to take the steps
necessary to realize these benefits. We are mindful of the
difficulties that Congress faces when asked to enact proposed
legislation before December 31, 2001. But the parties decision
to select that date was not entered into lightly. Quick
legislative action is necessary in order to conclude all
related litigation and ensure the availability of the spectrum
to the American consumers by the end of 2002.
The importance of the deadline for legislative action also
reflects the pendency of petition for writs of certiorari
before the Supreme Court.
We appreciate the care and seriousness with which this
subcommittee and the Congress have undertaken to review and
consider the proposed legislation. Chairman Upton, that
concludes my prepared statement. I appreciate this opportunity
to answer any questions that you may have.
[The prepared statement of Joseph H. Hunt follows:]
Prepared Statement of Joseph H. (``Jody'') Hunt, Counsel to the Deputy
Attorney General, United States Department of Justice
Thank you Chairman Upton, as well as the Members of the
Subcommittee, for allowing me to provide a statement concerning the
settlement agreement reached by the government, NextWave, and the
Auction 35 participants. That agreement offers an opportunity for the
government to end years of hard-fought litigation on terms that will
benefit the American public by providing for prompt deployment of
valuable telecommunications spectrum and adding billions of dollars to
the United States Treasury.
The government's dispute with NextWave dates back to 1996 and 1997,
when the company was the high bidder at auctions held by the Federal
Communications Commission (FCC) for wireless telecommunications
licenses. NextWave opted to pay its winning bids, totaling $4.86
billion, in installments, but soon sought bankruptcy protection. The
United States Court of Appeals for the Second Circuit agreed with the
government that NextWave could not keep the licenses while paying less
than the winning bid amount, and also held that the bankruptcy court
could not thwart the operation of the FCC's automatic-cancellation
rule, under which the licenses dissolved upon failure to make timely
payments. Following the Second Circuit's rulings, the FCC re-auctioned
the disputed spectrum earlier this year in FCC Auction No. 35. Winning
bids for that spectrum in Auction 35 totaled $15.85 billion, more than
three times the amount that NextWave had agreed to pay five years
earlier.
NextWave brought an action in the District of Columbia Circuit
challenging the FCC's automatic cancellation of the licenses and re-
auction of the spectrum. That court held that section 525 of the
Bankruptcy Code precluded the FCC's automatic cancellation of
NextWave's licenses. The government has petitioned the Supreme Court
for further review of that decision. Even if the Supreme Court grants
review and rules for the government, there remain other issues to be
litigated before the D.C. Circuit and the FCC on remand. Thus, there is
no assurance that continued litigation would allow the government to
put the spectrum to its most productive use or to recover the $15.85
billion bid at Auction 35. If the government does not prevail before
the Supreme Court or on remand, NextWave would retain the licenses, and
the United States might (depending on the treatment of interest and
penalties) receive only $4.86 billion for this spectrum. Moreover, even
if the government were ultimately successful in its pursuit of this
litigation, success would likely come after years of additional delay
in deployment of the spectrum in the face of continuing increases in
consumer demand for wireless telecommunications services.
Recognizing these disadvantages of continued litigation, the
government entered into settlement discussions with NextWave and the
Auction 35 winning bidders. The government pursued settlement as an
opportunity to provide for the prompt transfer of valuable, unused
spectrum to the Auction 35 Winning Bidders, whose bids provided strong
evidence of their ability to put it to the highest and best use, and to
increase the amount of money flowing into the Treasury by several
billion dollars over what the government might otherwise receive.
Extensive and complex negotiations, lasting more than two months,
culminated in a settlement agreement signed by the government, NextWave
and Auction 35 winning bidders representing more than $15.8 billion in
bids. Under the settlement, NextWave will surrender the licenses in
exchange for a guarantee of payment from the United States. The FCC
will then grant licenses to the Auction 35 winning bidders, who will
pay the full amount of their winning bids--approximately $15.85
billion. In exchange for NextWave's relinquishment of its claims to the
licenses, and after payment of taxes and other amounts to the
government required by the settlement, NextWave will receive
approximately $5.82 billion (net of corporate taxes on the
transaction).
As the Attorney General explained in his letter submitting the
draft bill to the Congressional leadership, the Department of Justice
has concluded that ``the settlement is strongly in the public
interest.'' This is a good settlement; it offers two tangible benefits
to the American people. First, it accomplishes by consensual
arrangement what lengthy and contentious litigation has been unable to
achieve--the award of spectrum to telecommunications companies that are
most likely to use it promptly and efficiently, thereby making possible
the expansion and improvement of widely used wireless
telecommunications services.
Second, it will bring substantial additional revenues to the United
States Treasury. The settlement is designed to bring into the Treasury
net payments in excess of $10 billion, after accounting for the payment
to NextWave. The Office of Management and Budget advises that these
payments will result in a net benefit to the budget (above the current
baseline) of approximately $4 billion. The public is far better off
with such an agreed resolution than it would be if we continued to
pursue judicial relief, especially given the uncertain prospects of
success and the delay associated even with a favorable outcome to the
litigation. The settlement is a compromise that recognizes the enormous
demand for this spectrum and recovers for the public most of the value
the spectrum represents to the winning bidders at Auction 35.
The settlement requires implementing legislation before it can go
forward. The Attorney General has submitted a draft bill that provides
statutory authority to proceed with the settlement. The settlement
specifies that Auction 35 should be implemented, with payment terms as
modified under the settlement agreement. By appropriating funds to
guarantee payment, the bill enables NextWave to relinquish its claims
to the licenses, which is a prerequisite to the FCC's issuance of those
licenses to the winning bidders at Auction 35. The bill also
establishes a limited and expedited structure for judicial review of
challenges to the settlement, enabling the spectrum to be put to use
expeditiously and bringing an end to this protracted litigation.
The judicial review provisions of the bill are designed to ensure
that any challenge to the settlement is presented to and resolved by
the courts as quickly as possible. Three kinds of challenges are
permitted--litigation concerning approval of the settlement under the
Bankruptcy Code, constitutional challenges to the FCC's approval of the
settlement, and constitutional challenges to the implementing
legislation. To ensure consistency and to promote judicial efficiency,
the D.C. Circuit will have exclusive jurisdiction to hear any such
challenge. Although the bill requires expedited treatment, it leaves
the court to set its own schedule, subject to an instruction that the
court act ``with a view to'' deciding the case within a certain period
of time ``if practicable.'' Similar provisions seeking quick action are
also provided for rehearing and certiorari review.
The bill provides ample opportunity for judicial resolution of
genuine legal disputes about the settlement. As in any bankruptcy case,
settlement must be approved by a bankruptcy court or district court.
NextWave has filed its motion for approval with the Bankruptcy Court
for the Southern District of New York, and the bankruptcy rules provide
for a period of notice during which any objections may be brought
before the court. If the bankruptcy court grants NextWave's motion for
approval, any objecting party may appeal that decision. The D.C.
Circuit, which is familiar with the case, will have exclusive
jurisdiction to hear any challenge to the constitutionality of the
settlement or the legislation.
The bill precludes nonconstitutional challenges to the FCC's
implementation of Auction 35 pursuant to the terms of the settlement
and the legislation. Congress's express approval of the settlement
would eliminate potentially time-consuming litigation. Similarly,
because of the importance of putting this valuable spectrum to use as
quickly as possible, the bill precludes courts from entering an
interlocutory order enjoining an Auction 35 licensee from using the
spectrum before the expedited review process has reached finality.
Legal disputes that would not affect the implementation of the
settlement--such as questions about the qualifications of a winning
bidder--are not subject to the provisions for expedited treatment and
can proceed in the normal course. The judicial review provisions of the
bill permit bankruptcy challenges that are otherwise authorized under
current law.
We believe that the bill is constitutional in all its particulars,
and that there are no other judicial obstacles to full implementation
of the settlement. The settlement nevertheless addresses the
consequences of an adverse ruling. If a final court order prevents
NextWave from surrendering the licenses, the settlement will not go
forward. If a final order bars the FCC from implementing Auction 35,
the government will again hold valuable wireless spectrum and could
offer it in a future auction as appropriate.
I want to emphasize that the Department of Justice, after careful
consideration, has concluded that this settlement of the NextWave
litigation offers significant benefits to the American public. Because
the settlement requires enactment of legislation before it can go
forward, the Department strongly urges the Committee, and the Congress
as a whole, to take the steps necessary to realize these benefits. We
are mindful of the difficulties Congress faces when asked to enact
proposed legislation before December 31, 2001. But the December 31,
2001 date is a necessary component of this carefully negotiated
settlement; the parties' decision to select that date was not entered
into lightly. All parties, including the United States, need to bring
an end to the wrangling over these licenses and put the spectrum to
good use. Legislation is necessary by December 31, 2001, in order to
conclude all related litigation and ensure the availability of the
spectrum to the American consumers by December 31, 2002. The December
31, 2001 date for enactment also reflects the pendency of petitions for
writs of certiorari before the Supreme Court, an important component of
the time pressures that were considered.
The parties have said that they are willing to settle this case on
the terms set forth in the agreement, but only if the legislation can
be enacted by December 31, 2001. If the implementing legislation is not
enacted, we will return to litigation in which our prospects are
uncertain and the path to success a long and costly one. Only if
Congress enacts the implementing legislation and keeps this settlement
agreement in place are the American people certain to realize promptly
both the improvements in wireless telecommunications services and the
addition of several billion dollars to the Treasury. We appreciate the
care and seriousness with which this subcommittee and others in
Congress have undertaken to review and consider the proposed
legislation. After careful analysis, we have concluded that the
settlement is in the public interest. We hope that you will agree.
Chairman Upton, that concludes my prepared statement. I very much
appreciate this opportunity to present the Department of Justice's
views on this important issue, and I would be pleased to respond to any
questions you may have.
Mr. Upton. Thank you both. We are going to proceed with
questions from members using the 5 minute rule, and I will
yield first to the chairman of the full committee, Mr. Tauzin
for 5 minutes.
Chairman Tauzin. Thank you, Mr. Chairman. I think it is
important to put this whole matter in a bit of perspective
here. Congress, as you know, Mr. Chairman, determined to move
away from various forms of spectrum allocation including all
sorts of lotteries, and other forms of distribution of
licensing in favor of this auction.
And Congress had a choice. We could have passed a law that
said to the FCC that when you auction off spectrum from now on,
cash on the barrel head. We could have said that. That would
have limited the potential of people coming to these auctions
to only those folks who had the avail cash on the barrel head,
and who could come forward with enough financing in advance of
the auction to pay for the purchase as soon as the auction was
concluded.
That is the way that a lot of auctions are conducted in
this country. You can't do it on credit. We decided instead to
permit auctions on credit, and to allow people to come into the
auction process to bid for spectrum, and to put down a small
amount as a downpayment, with the understanding that they would
pay the rest of the auction bid over time.
In effect, we decided to provide for government financing,
time to go out and do the financing behind the auction bids in
an attempt to keep the auction processes as open as possible to
as many Americans as possible.
I thought that was probably a good idea. But let's put a
few other things in perspective, too. When these C-Block
auctions occurred back in 1996 and 1997, and the parties like
NextWave showed up and bid, and in this case $4.86 billion for
these licenses, and they did so under a credit system, they did
so based upon the financing arrangements that they could
reasonably assume would be available for them to pay for these
licenses over the time allowed under the auction process.
But then you see that the government did something else,
too, about that time. Congress tried to find money for its
budget problems, and authorized more spectrum sales, and so the
government was forced to provide additional spectrum auctions
and additional sales.
Some would argue that the speed in which Congress and the
FCC went out and auctioned additional spectrum had several
deleterious effects upon the C-Block auctions. First of all, it
diminished the value of those licenses as we put more spectrum
out into the public domain, and therefore made each bid on
spectrum less valuable.
Second, it may have severely undercut the capacity of
groups like NextWave to go out and do their financing as the
value of their asset, the spectrum they had bid in, made have
been diminished by the government action.
I mean, what I am saying is that we may have contributed to
the failure of this process because budgeteers were making the
decision about spectrum auctions instead of communication
policy experts.
Because budgeteers were driving the FCC to produce more and
more dollars out of spectrum sales at a time when budgeteers
wanted to balance the budget. There were many on this committee
arguing to the Budget Committee that you are going too fast,
and you are going to force auctions in which we are not going
to get any money.
And guess what. There was an auction that occurred--and I
forget the name of it, but we got one dollar, I think, for a
successful bid in that subsequent auction. So when we think
about responsibility here, let's put a little bit on ourselves.
Congress, yielding to the demands of the Budget Committee
for more and more money for spectrum auctions, may have messed
up, bundled this process of credit auctions under which
NextWave and other bidders on the C-Block auction went forward.
But once NextWave successfully bid in its spectrum, I
believe the Circuit Court was correct. It acquired a property
right in that spectrum, and now the Circuit Court has said so.
And despite all the claims of the FCC that they had a right
to pull that spectrum back and sell it to anybody that they
wanted to, the Court said, wait a minute, you can't just do
that. You auctioned this off to NextWave, and they bid it in,
and they put their money down.
And they even came back when the value of that spectrum
began going up in the marketplace again, and they came back and
said we will pay you ever dime that we owe you, plus. We will
give you a bonus if you take your money now and settle with us.
And the government said, no, we want the spectrum back
because we think we can sell it for a higher price, and that is
what the government tried to do. And the Circuit Court
basically said you can't do that in America. You just can't
take somebody's property because you want to sell it for a
higher price than you sold it to them.
And the Circuit Court said no to the government, that you
can't do that. NextWave has a property rights interest. That
being the case, we have got to resolve this thing now. And what
we have before us, I think, Mr. Chairman, is the recognition.
And indeed as Chairman Powell has told us, that under the
circumstances we now find ourselves with NextWave having a
property right in this spectrum, with the spectrum being worth
a lot more today than it was when NextWave bid it in initially.
But remembering that it was worth a lot less when NextWave
was trying to put its finances together before it had to
declare bankruptcy. Remembering that we may have contributed to
that situation by rushing out too much spectrum in auctions
that I think ill-considered, ill-timed, and not in all respects
conducted properly.
The bottom line is that we now find ourselves with a
situation where the government can now not only recoup its full
$4.86 billion, but a great deal more. And the folks who came in
and bid at this auction that the government set up trying to
resell this spectrum, are now prepared to put up that money and
to put this spectrum to use, and NextWave will be respected in
its property rights.
Now, I don't know how you can settle this thing any other
way that would be fairer, and would be consistent with public
policy considerations, and constitutional rights of the
parties.
And at the same time get this spectrum out the way that we
intended in 1996 and 1997 to the users in America who
desperately want to use it. I don't know how you would do it
any other way, except through protracted and extensive more
litigation, all of which could have been avoided in the first
place if Congress and the FCC hadn't made a bunch of bad
decisions back then.
Now, I think we have some complicity in this. I think we
are partially to blame for the mess that has been created. I
think we all have to extricate ourselves from it the best way
we can, and I think, Mr. Chairman, that you put your finger on
it.
This is literally the best that we can do in the public
interest to settle this mess, recognizing property rights like
the D.C. Court did. And at the same time recouping for the
government its money due, and more importantly getting the
spectrum out to folks in America who should have been enjoying
it since 1996.
Now, if I am wrong in any of that, I wish, Mr. Chairman,
that you would correct me in whatever time remains. Then, Mr.
Chairman, I yield back.
Mr. Upton. The gentlemen's time has expired. The gentleman
from Massachusetts, Mr. Markey.
Mr. Markey. I followed it completely, Mr. Chairman, and I
thought you did a good job laying out all of the competing
considerations that have to be factored into this decision.
You know, on spectrum policy, Congress is schizophrenic.
There is no question about it. Sometimes we say to the
Commission to auction it off. Other times we say give it free
to the broadcasters, and other times we say forego auctions,
because there is some other public interest consideration.
We make various decisions here based upon what we believe
to be the best balance of policies to compete out in the
marketplace, but also to serve the public interest, and that's
what Section 309(j)(3) talks about, and not just insuring the
maximum amount of revenue comes in, but all these other values
as well.
And I know that we are all talking about money here, but we
are talking about a lot of other very important things, too,
that have to be put out here on the table. Now, Mr. Dingell and
I gave you kind of a homework assignment on short notice.
And we very much appreciate, Mr. Chairman, your very rapid
response to some very complex questions. And in the answers,
you told Mr. Dingell and I that the FCC has not taken action on
petitions questioning the eligibility of NextWave, the whole C-
Block licenses. That is the Verizon Voice Stream petition.
You say that there is no investigation that was performed
because the licensees and licenses were subject to litigation.
And you stipulate that the Commission has conducted no
extensive review of NextWave's ownership structure since its
original 1997 license grants.
And we could go on here, but from my perspective, we have
got urban communicators sitting out here. They will be on the
next panel. They are kind of the remainder men of this story
line, with an unresolved ending for them and for others who are
similarly situated.
I don't think that Congress has a policymaker can or should
allow that to happen. I think we need to quite clearly
articulate what the policy is going to be, and not just for the
largest bidder, but also for every other bidder, just out of a
sense of fairness, equity.
Now, that is what we were structuring here, and one of the
questions that I have, and I pose it to you, Mr. Chairman, as a
potential alternative, is if our goal is to get the spectrum
out into the market soon, what if the FCC simply ceased
litigation, and accepted that NextWave is the licensee as Mr.
Tauzin just said.
And then mandate that it fully filled out its wireless
infrastructure, and compete against the incumbents using the
wholesale strategy that it said was going to be its marketplace
strategy.
And recognizing the fact that the CBO scoring of $10
billion is completely illusory. They are going to score this
whole thing as a loss, and so that there is only a marginal
difference of opinion.
At least that way we would get a competing network built
out there, and would add more competition to the marketplace,
and would fulfill the requirements of Section 309(j)(3), that
we provide the consumer with those additional choices.
Why isn't that a better alternative since the competing
bidders who slot to get into this market, the Alaska media
wireless, and Salmon wireless, were told by the FCC that they
were bidding on something that was very speculative.
And in fact, NextWave might wind up as the legal owner of
the spectrum, and so they already know that, the new bidders,
the people that sent it up to $16 billion or whatever it was.
So why don't we just go that route, Mr. Chairman. Why isn't
that a better route, and then at some point in the future if
they want to see it they can sell it, but at least we will have
ensured the integrity of the process; that is, in terms of
the--well, of course, that is impossible completely in this
situation.
But at least we will have a new competitor out in the
marketplace consistent with what NextWave promised initially
when they bid for this spectrum.
Mr. Powell. Sure, I will take my best shot. It is an
alternative, and certainly one that the Commission considered
would be before it if this settlement was not codified. First,
as to why not. It is by far not a certainty or a finality, or a
conclusion.
For example, there are many, many continuing regulatory
proceedings that would have to be revived in the context of
NextWave's qualification as a licensee that remain pending.
The Commission would have to spend a significant amount of
time considering and evaluating those petitions and
considerations. If they led to disqualification, it would
require another substantial period in which they would be
designated for a hearing and evaluated, and arguably continue
in litigation and upon appeal.
And at least one set of answers is that it would not be a
final settlement of the litigation aspects, because they would
go on for quite a bit longer. Another point that I would like
to make is about an additional competitor.
Certainly there would be additional an competitor, but as
you noted, their model was to be a carrier's carrier, which is
to provide capacity to other carriers. They would not as a
consequence be a retail alternative competitor for consumers.
And compare that to the fact that in Auction 35 the list of
companies that stand to win licenses and put them to use are
not all existing companies that are already providing
competitive choices.
Many of them would be new competitive entrants in
particular markets, including some small and new
entrepreneurial entrants, and so many of them would be
providing service that I would argue even more new competitive
choice for consumers than the default of just simply awarding
to them a single company which might provide modest competitive
benefits, but not retail competitive benefits.
Mr. Markey. I think I understand what you are saying. It is
very speculative what would come in if we auctioned this
spectrum again 5 years from now, or NextWave sold it 5 years
from now, and what would be the benefit of NextWave's strategy
in the marketplace, as opposed to some other smaller company.
Although that I think that we all pretty much have a good
idea that some of the companies that are players in this
auction actually want to add this spectrum to already existing
services.
I think that is what Verizon and SPC are all about in this,
and that is quite different than adding a new competitor. We
know that as well, and I think you should stipulate that in
your testimony. That's also part of this.
But what I am saying to you is that if you remove that
direction, that at least NextWave then would have fulfilled its
obligations. It would have built out. The option process would
have had some approximation of having fulfilled what its
original intent was, although it was a long and winding road.
And I think to a certain extent that is a very strong
signal to send to companies that might look at this as kind of
an opportunity to move in, bid for spectrum, and sit on it, and
never build out, and not even have the proper financing
perhaps, but they own it now, and not see the consumer with a
competitive company out in the marketplace.
And all I would say is that this hearing helps to kind of
frame some of the other alternatives that might be out there in
looking at a way of resolving the issue. Thank you.
Mr. Upton. Thank you. Mr. Chairman, you asked in your
opening statement, you asked the question is there a better
alternative, and as we all listened to the opening statements
on both sides, I think we all lament that there is probably not
a better alternative than what is on the table before us.
I think that a lot of us see the writing that is on the
wall, and we also see the calendar and the clock ticking to
December 31, and we also know that there is probably a very
limited number of legislative days, perhaps until only the end
of this week, before this session of Congress wraps up until
next year, though there is a chance that we will be in next
week.
What do you think would happen if for some reason we don't
see a legislative fix or a legislative agreement before we
break in the next couple of days? What is your prediction as to
what will happen?
Will we wait for the courts to step in and perhaps before
the Supreme Court, or do we see everybody walk away, or do we
see the candle relit for another 90 days? What is your
prediction as to what would happen?
Mr. Powell. I think that it is difficult to predict, but I
think a lot would have to do with whether there was a
perception that a result was coming.
Mr. Upton. I mean, I think everybody knows that we are
pretty close, maybe.
Mr. Powell. I think that each of the major sets of parties
would make judgments about how likely and how soon they thought
a possible resolution was coming. It is important to review
what I think the window of opportunity is and why after this
date there are these exigencies.
First of all, the government. We have sought certiorari,
and that case continues to progress. At some point the
government transitions from being a party to a settlement, and
it has to put on its Supreme Court litigating fighting hat, and
that is a role that it has to play.
And as the months go by, it increasingly gets closer to its
obligation to serve that role. If you take the Auction 35
winners, they certainly did take spectrum at option fully aware
of the risks.
But those risks have come true, and they are busy trying to
justify to boards and shareholders why they continue to be
under the potential government obligation for significant
amounts of money, foregoing other opportunities to make network
modifications and upgrades.
And they have been willing to participate in the
discussions and resolution of those under the anticipation that
if it really comes through in a sufficiently timely way that it
will be worth it.
But when it starts dragging on in time, I think there are
serious questions whether many of the Auction 35 winners would
be willing to be a participant in settlement and might very
much prefer to simply have it go down, and seek other
alternatives for their needs.
And by the way, they do so with full knowledge that one day
this spectrum, if framed by the government as a public asset
will be sold again. And perhaps at better values than what it
was sold at the present auction.
So I think they are a fragile part of the settlement, and
you can ask Mr. Strigl and Verizon their judgment when they
come up in the second panel. And then I think it is important
that the other part of the window exigency was that the
bankruptcy proceedings march on.
NextWave as a bankrupt party is in that proceeding, and has
milestones to meet with the Court. That Court is willing to
entertain possible settlements that restore creditors, but at
some point that process continues to advance and mature.
So those are the factors that result in the frugality and
what will happen will be an individual judgment of each of
those parties. As a formal matter under the settlement, after
that date, none of those parties is legally bound to terms and
conditions, and each would enjoy a new individual judgment as
to whether to proceed at all.
Mr. Upton. So the bottom line would be that it would be
pretty hard to put Humpty-Dumpty back together again?
Mr. Powell. There will be a lot of pieces, yes.
Mr. Upton. Does the full Commission need to approve the
settlement, or do you have that authority as Chairman? What is
your sense?
Mr. Powell. I think that the important point is that this
is the settlement of the litigation, and not an administrative
or Commission act. It is one in which the Department of
Justice, as the counselor to the Federal Communications
Commission, plays a principal role.
And indeed it is important to note that this settlement
really was an opportunity for the Commission and the government
to put the parties together and to try and find terms and
conditions under which they could reach mutual agreement.
It was clear that that could not be done by the Commission
under its own authority, such as questions about how to move
the money. And so in essence it is a proposal to Congress to
embrace the legislative terms.
Under Section 5(a) of the Communications Act, it firmly
vests in the Chairman of the Federal Communications Commission
the special right to propose legislation and to work with other
government agencies in the resolution of disputes and that is
the provision on which I acted.
Mr. Upton. All right. Mr. Hunt, do you have a comment with
regard to the first question that I gave to Chairman Powell?
What happens if the clock runs out?
Mr. Hunt. Well, I agree with the Chairman's comments. I
might only add that having sat through more than 2 months of
negotiations with all of these parties, and with 40 or 50
lawyers every day and every night, I would not begin to predict
the likelihood of being able to put humpty-dumpty back together
again once the date passes.
But everything that the chairman stated was accurate--and
reasons why we were driven to the time constraints that we were
driven to with respect to this agreement.
Mr. Upton. Thank you. Mr. Boucher.
Mr. Boucher. I would like to take just a moment to inquire
as to the necessity of Congress acting in this matter. We have
an agreement before us which has been signed by the
stakeholding parties. Why can't that agreement simply be put
into effect on its own? Why does Congress have to do anything?
Mr. Powell. Let me take a stab at that, and then offer Mr.
Hunt an opportunity on the part of the Administration as well.
The first issue that became complicated was literally the
simple mechanisms for moving money.
As I alluded to in my opening testimony, you have a company
that under the ruling of the court is in rightful possession of
the licenses, and basically in order to disgorge them they need
to be paid.
No one at the Federal Communications Commission, as I said,
has a checkbook or the kind of authority necessary to draw on
the funds of the United States Treasury. And so that was one
set of problems and difficulties.
Moreover, even though there is potentially money due to the
U.S. Government which would cover the costs of disgorging
NextWave of the licenses, it was clear to us that: one, there
was a legal issue as to what it would be received for if, for
example, Auction 35 is not in legal effect, which is at least
questionable under the D.C. Circuit ruling.
And you just don't take money from the U.S. Government for
any reason, and then even if we could find a way to do that, it
was clear that nobody had the ability to then reissue those
funds to NextWave in the context of a settlement.
So first and foremost because of the merry-go-round of
money that is necessary--we felt had to have the kinds of
authorization of the institution empowered to make
appropriations. The second set of issues, at least from my
perspective, is that there is a host of thorny legal matters as
a consequence of the D.C. Circuit's decision that would raise
legal risks and vulnerabilities to any settlement without the
blessing of Congress. Because of the ruling of the D.C. Circuit
if the licenses automatically canceled when we sold them, we in
essence didn't really have them to sell.
While we thought we had arguments that could justify our
redistributing them to the Auction 35 winners, the auction
winners and NextWave themselves were particularly uncomfortable
with committing to these settlements if there were a host of
risks and vulnerabilities that would be ultimately overturned
like an apple cart because of these odd legal postures.
So since it was necessary to get appropriation authority,
it was thought that the settlement of that finality would be
equally meritorious. I am confident that we explored many ways
that we could have done it without Congressional intervention
and came to the conclusion that we didn't feel comfortable that
we could.
Mr. Boucher. Well, I would assume that on the first point
that an appropriation meets your needs. And that potentially
might be easier to obtain than taking legislation ab initio
through the entire Congressional process.
I am not confident of that, but perhaps it would be. On the
second point, I am a little bit perplexed about who would have
standing to challenge the agreement. You have suggested that
there is some legal uncertainties.
Are you saying that you are concerned that some party not a
signatory to the agreement might go to court and challenge its
terms, and demonstrate to the Court that it has standing even
to be there in order to do that?
I have some real doubts about that. In the alternative, are
you saying that you need direct statutory authority to issue
these licenses now to the companies that prevailed in the
second auction, or do you think that you have sufficient
authority to do that?
Mr. Powell. First of all, candidly, we have learned in this
litigation that nothing is beyond the realm of possibility that
could upset an otherwise valid decision.
But, yes, I think that there was some concern that there
could be standing and challenges by parties who were not part
of the settlement. Indeed, we have already seen some companies,
and some testified before the Judiciary Subcommittee just the
other day, raising questions and concerns about the settlement
when they had yielded in the auction, or had otherwise complied
with the rules and provisions of the auction rules.
So those were concerns, and I should say that you might ask
that again in the next panel. I think the concerns were very,
very serious to the private parties more than to the
government.
We believe that while risky, we thought that there were
some challenges and responses that we would have to such
claims. But nonetheless there were very significant commitments
being made here.
And again given that there was going to be this need for
the money movement, there was a desire to have that done as
well, and maybe Justice has a better view on it.
Mr. Boucher. I will take your advice and propound that
question to our next set of witnesses. Let me finally ask one
other question. NextWave was obviously the largest winning
bidder in your initial C-Block auction.
But there were also some other winning bidders in that
first C-Block auction that like NextWave declared bankruptcy,
and declared bankruptcy at a time when they had those licenses.
We are probably going to be hearing shortly from one of
those other companies, a company called Urban Communications.
Let me ask you if there are any other companies that are
precisely similarly situated to NextWave, meaning that they
declared bankruptcy, and the Commission has now received a
court order requiring a reinstatement of the license to that
bankrupt entity. Is there any other companies situated that
way?
Mr. Powell. There are, and I would ask Justice to add to
this as well, but to my knowledge--and we need to verify this--
there is only one company similarly situated to NextWave in
near identity, and that is Urban Comm.
There are other companies to which there are issues
associated with automatic cancellation that at some point have
to be resolved as well. They are not necessarily companies
whose licenses found their way back into the Auction 35 morass.
But there are companies in which the Commission has
positions that they automatically canceled, and had to be
reconsidered. I would also caution that because of some of the
complexities of Federal Court litigation there is probably at
least a host of legal issues about other Circuits considering
matters in different parts of the country in which some of
these companies reside.
And the government continues to be careful in the position
that it takes with respect to remaining litigation.
Mr. Boucher. Mr. Chairman, may I have unanimous consent for
1 additional minute?
Mr. Upton. Hearing no objections----
Mr. Boucher. Chairman Powell, is there anything in this
settlement that prejudices the rights of Urban Communications
or another company that might be similarly situated to
NextWave?
I mean, they still have the full range of opportunities
available to them that the law provides, even if this
settlement is approved, do they not? So, I mean, do you see any
way that this settlement might actually cause harm to such a
company?
Mr. Powell. I don't think it causes harm, although I am
more than understanding of the concerns of that company
particularly, and the fact that they are sort of similarly
situated, and see the opportunity to settle their growing
concerns.
Our position by the way is that we have never been opposed
to that, and we have always maintained that we are relatively
open to settlement discussions with Urban Comm as well. Indeed
our only position has been that we wanted to first resolve the
NextWave litigation, which had different exigencies associated
with it, and different financial obligations associated with
it.
We needed some understanding of what parameters we would
really be able to operate in, in continued settlement
discussions, but that is what we tried to convey both to that
company and in our own deliberations.
And I think we have already in fact began to consider some
options with respect to that particular party, and I think that
there still is a realistic possibility that it could be settled
with the government as well.
Mr. Boucher. Thank you, Mr. Chairman.
Mr. Upton. Okay. The Chair will recognize Mr. Dingell for 5
minutes.
Mr. Dingell. Mr. Chairman, thank you. First, Mr. Powell,
thank you for your assistance to Mr. Markey and me. Second of
all, I would note that the Bureau ordered NextWave to come into
compliance with the foreign ownership rules within a set time.
But that the full Commission neither ruled nor evaluated
whether NextWave later complied with the order; is that
correct?
Mr. Powell. That is largely correct, yes.
Mr. Dingell. Okay. Now, Mr. Chairman, I would note that the
Commission has made no final determination with regard to
whether the claims have any merit, referring to the matters
with regard to NextWave's qualifications; is that correct?
Mr. Powell. That's correct.
Mr. Dingell. Mr. Chairman, has the Commission undertaken
any formal investigation with regard to the claims?
Mr. Powell. Those claims, the recent ones filed in July,
are pending, and there have been no formal actions taken yet.
Mr. Dingell. Are the questions of the validity of those
claims important or unimportant?
Mr. Powell. They are important, but they are potentially
mooted if NextWave is never a licensee.
Mr. Dingell. But they are important in determining whether
or not there is compliance with the law, and with the public
interest; is that right?
Mr. Powell. Yes. But it is important to note that the
qualifications are requirements of a license holder, and in
many ways what has complicated those issues is that if NextWave
gives up licenses and does not stand as a holder of licenses,
there aren't qualifications for it to meet.
Mr. Dingell. But what you are really saying is it only
becomes irrelevant if we bless the settlement; is that right?
Mr. Powell. That's absolutely correct.
Mr. Dingell. So if we do not, those questions remain then
to be important; is that right?
Mr. Powell. That's right.
Mr. Dingell. Now, Mr. Chairman, is it fair to say that
there is some reasonable basis to believe that NextWave may not
be entitled to the reinstatement of its licenses?
Mr. Powell. We don't have any reasonable basis to make that
opinion one way or the other at this point, no.
Mr. Dingell. So you can't tell us yes and you can't tell us
no?
Mr. Powell. That's correct.
Mr. Dingell. Thank you, Mr. Chairman. Now what would happen
to these outstanding claims if the settlement is approved by
the Congress? They are mooted are they not?
Mr. Powell. Yes, sir, they would be mooted.
Mr. Dingell. I note that NextWave filed a second plan of
reorganization with the bankruptcy court in August of this
year, and that the Commission, through its lawyers at the
Department of Justice, objected to that plan. Can you tell us
what was the basis for the Commission's objections?
Mr. Powell. I will ask the Department of Justice to comment
on that as well. My recollection is that we reserved the right
to continue to consider the qualifications of the licensees
under the second reorganization plan, rather than endorse it as
proposed.
Mr. Dingell. That tends to comport with my understanding,
and the way that I understand it is this, and tell me if I am
incorrect. Among other things, there is an outstanding claim
against NextWave's qualifications; is that right?
Mr. Powell. I'm sorry, Mr. Dingell?
Mr. Dingell. Amongst other things, there are outstanding
claims against NextWave's qualifications; is that right?
Mr. Powell. That's correct.
Mr. Dingell. And that the Commission has reserved the right
to reevaluate NextWave's status as a licensee in the light of
the proposed reorganization plan and its effect on the
company's financial structure?
Mr. Powell. Yes, it would be obligated to do so.
Mr. Dingell. I think that is generally what you said. Now,
the second point that we are discussing, the need for the
Commission to evaluate NextWave's status as a licensee, has
that been completed?
Mr. Powell. No it would have to be revived if NextWave
ultimately became the licensee.
Mr. Dingell. All right. Is it fair to say that NextWave's
current financial structure is substantially different than
when the licenses were originally issued?
Mr. Powell. I am not certain. It is my understanding that
it is, but maybe those who participated in bankruptcy court
might more fully know.
Mr. Dingell. Maybe with all respect I could say, Mr.
Chairman, that I think that the FCC does not know; is that
correct?
Mr. Powell. The FCC, as you have noted, has not taken a
comprehensive auditoring or investigation of the structure that
would allow it to conclude one way or the other.
Mr. Dingell. And that was the next point that I was going
to make. The Commission has not evaluated NextWave's
qualifications since 1997, and there is also evidence of a
tremendous amount of investment pouring in to NextWave at this
time, is there not?
Mr. Powell. Clearly, if public press reports are to be
believed on what we know from the bankruptcy, they have secured
additional financing.
Mr. Dingell. And it would appear that that should be
considered on a fully diluted basis according to the rules of
the FCC which require that kind of consideration; is that
right?
Mr. Powell. I believe so, but I would have to check on
that.
Mr. Dingell. If you want to add to that, Mr. Chairman, I
would ask that the record remain open for that particular
point. And I would note that this would then reduce the control
group's authority and potentially violate designated entity
rules if that occurs; is that correct?
Mr. Powell. We do have rules, and as you have noted, they
would have to be examined carefully to determine whether the
structure complied with our rules, yes.
Mr. Dingell. Now, I would note, Mr. Chairman, that all of
these questions are being begged by the consideration of these
proposals before the committee. Now, Mr. Chairman, just a
couple of more questions.
When designated entities' licenses are transferred or
assigned, the Commission would normally evaluate how the
financial proceeds would be distributed to the investors; isn't
that correct?
Mr. Powell. Yes, the FCC would have to assure itself that
the party was making a transfer that complied with our rules,
yes.
Mr. Dingell. And again, Mr. Chairman, that has not yet been
done?
Mr. Powell. No, it has not been done, and under the terms
of the settlement it would not constitute a transfer from one
company to the other, and that would not trigger it.
Mr. Dingell. But that would only be under the terms of the
settlement as approved, and would in fact constitute a
significant change in the rules of the Commission?
Mr. Powell. If NextWave ever had perfected an interest in
the licenses and made an effort to transfer or sell them to
other parties, it would trigger the consideration of those
rules.
Mr. Dingell. Now, Mr. Chairman, I would note that the
Commission, I think, has not evaluated how the $6 billion
distribution of this case would be distributed as between
NextWave's control group, and the non-control group of
investors, because the FCC indicates that this is not necessary
because NextWave is technically relinquishing its licenses
under the settlement, and there is therefore--and I quote--no
transfer or assignment; is that correct?
Mr. Powell. Yes, sir.
Mr. Dingell. So from a policy standpoint, let's address
this question. Should the fact that there is no technical
transfer or assignment in this case, and that the government is
paying NextWave instead of a private party cutting the check,
changed the underlying importance of ensuring that the
distribution is proper from a designated entity's standpoint?
And I believe that the answer to that question is probably
no; is that correct?
Mr. Powell. The policies are still important, but the
technicalities are more than technicalities. They are important
as to whether they are threshold obligations that trigger the
rule.
Mr. Dingell. Thank you, Mr. Chairman. Mr. Chairman, you
have been very gracious. Thank you.
Mr. Upton. Mr. Shimkus.
Mr. Shimkus. Thank you, Mr. Chairman, and Chairman Powell.
Again, two quick points. I know that as much as we have the
debate about the current issue we are looking at public policy
on how to correct this so that we do not fall back into this
trap again.
And I know that many government agencies at a lot of
different levels do not always accept the highest bid, because
in the contractual arrangements there are criteria by which
companies are to meet, and so the one that meets the best
criteria with another determination on the price sometimes are
allowed to win the bid.
And to me this is where I think this was probably a failure
of more specific legal language. And that is just an opening
premise. You mentioned in your testimony that it is important
for Congress to make clear how spectrum auctions are to be
treated under the U.S. Bankruptcy Code so that these cases
never happen again.
What would be your recommendations, Chairman Powell, in
this regard? How would you like us to assist, and maybe
legislatively, or what changes do you see in the rulemaking
process to fix this?
Mr. Powell. I believe that to a large degree the Commission
has taken whatever additional options that are available to it
without additional consideration by the legislature.
There is tension between the specific provision that the
D.C. Circuit cited for its decision and the expectations that
we have about auctions. These are two important legal regimes,
and I think that they are intense if what we hope is that
future auctions would proceed with certainly without the risk
that the public spectrum could be pulled out of the marketplace
and essentially warehoused through a long and lengthy
bankruptcy proceeding.
The Commission for the last several years has indeed warned
of this concern, and it has nonetheless come to fruition and
has a number of times offered its expert advice in proposing
legislation, prospective legislation, and particularly that
would help with that tension in this situation.
And I think we would be more than willing and a partner in
efforts by this committee or other appropriate committees in
considering those issues.
Mr. Shimkus. And if I can be so bold to talk to the
chairman, I think that is probably what we will be looking at
doing sometime in the spring of next year. That's all the
questions that I have, Mr. Chairman, and I yield back.
Mr. Upton. Mr. Green.
Mr. Green. Thank you, Mr. Chairman. Mr. Chairman, what
would be the impacts if the wireless carriers did not get this
section of the spectrum?
Mr. Powell. Well, it is difficult to say given that there
are many, many markets being served, and the impact would
likely vary fairly significantly across markets. But needless
to say, we have all read the articles and have an understanding
and appreciation about what a premium is being placed on
spectrum these days and whether there are debates about third
generation wireless spectrum, the importance of 911, and any
911 services. By the way there is a growing body of consumers
who are deeply frustrated with the quality of service and call
completion.
Many of those issues are capacity issues; constraint about
the spectrum that will ensure quality. I would submit that
those are as important as competition, but I think that this is
a significant amount of spectrum as evidenced by the value that
was placed on it at reauction.
And if it continued to not be available, and to be used in
the market, I think that the impact would be significant, and I
think it would grow. I think that each year it would become
even more pronounced in a way that consumers would see.
Mr. Green. Well, again, you would see a deterioration of
service, but there wouldn't be any problem with the current
delivery of it. You are just talking about the increase in
growth that we need and for the industry to continue----
Mr. Powell. I don't have the statistics at hand, but
wireless subscription and minutes of use continue to grow at an
extraordinary rate. One might argue in certain markets already
capacity constraints, tower site issues, are preventing the
service reaching the level of quality that some consumers want,
expect, and demand.
And that is even before you start discussing many of the
new and exciting services that we hope to see deployed by
carriers that will require variations in their spectrum. Now,
that said, it is a little difficult to over-generalize from
carrier to carrier, from market to market.
But in general those are the circumstances that we see in
the wireless market.
Mr. Green. If Congress doesn't act on the settlement and
the Supreme Court rules in favor of NextWave, will NextWave's
designated entity status then come under review by the FCC?
Mr. Powell. It is my belief that we would have to resolve
pending petitions on those issues, yes.
Mr. Green. And in the buildout requirements, for NextWave
required to meet the condition of attaining their licenses,
what were the buildout requirements for them? Do you recall?
Mr. Powell. Yes, I believe the build-out requirements were
that major milestones would have been basically a month from
now, but given as you understand the sort of mess and
complexity of this particular issue, if NextWave were awarded
licenses, we fully expect that they would file and demand
relief in terms of the buildout requirement given the
incumbrance of the spectrum during the period in which we
litigated.
I can't speak to what the outcome would be, but it would be
a Commission decision. That is a month away, and nobody has any
expectation that if the Supreme Court ruled for the licensee
were tomorrow that they would be built out to their
requirements by January.
Mr. Green. Mr. Chairman, on an unrelated action, I noticed
that the First Circuit Court recently ruled that Echo Star and
Direct TV, which we had a hearing on last week, must comply
with carry one-carry all requirements achievement. Can you say
that they might be able to comply with this by January 1, 2002?
Mr. Powell. Congressman, candidly, I just don't know. I
have only just recently seen the decision and have not read it
fully, and don't fully understand yet what the requirements
that the Court held are. So I would be happy to talk with you
about it further later when I have a better understanding.
Mr. Green. Okay. I appreciate that. Thank you, Mr.
Chairman. Oh, I would be glad to yield to the ranking member.
Mr. Markey. And it would only be to ask for unanimous
consent, Mr. Chairman, that the questions and the answers to
the document which Mr. Dingell and I sent to the Chairman last
week be put in the record.
Mr. Upton. Without objection.
[The information referred to follows:]
Federal Communications Commission
Office of the Chairman
December 10, 2001
The Honorable Edward J. Markey
Ranking Member
Subcommittee on Telecommunications and the Internet
Committee on Energy and Commerce
United States House of Representatives
2108 Rayburn House Office Building
Washington, D.C. 20515
Dear Congressman Markey: Thank you for your letter of December 6,
2001, regarding the NextWave settlement and companion legislation.
Enclosed are my responses to each of the questions that you posed.
I trust this is responsive to your request, and I look forward to
discussing this important matter with you at the December 11th hearing.
Sincerely,
Michael K. Powell
Chairman
enclosure
Responses to NextWave Settlement Questions
Question 1. How much money will NextWave receive as a result of the
proposed settlement, before and after Federal income taxes? Does
NextWave now or has it ever provided a commercial mobile service using
the licenses obtained in Auction 5? Please explain applicable
Commission rules relating to: a) the required holding period for
licenses assigned to a designated entity; b) the build-out requirements
for such licenses; c) avoidance of unjust enrichment associated with
early transfer or assignment of such licenses; and d) to whom such
early transfer or assignment normally would be permitted.
Response: The settlement provides that, in exchange for NextWave's
relinquishment of the licenses, the government will net $10.031 billion
from the sale of licenses in Auction No. 35 covering the same spectrum
previously licensed to NextWave, and NextWave will receive an initial
cash payment of $6.498 billion; however, NextWave's net payment from
the government, after adjustments for amounts held by the government
and other payments by NextWave, is $5.819 billion. The transaction is
explained in greater detail in the attached schedule at Tab 1, which
explains how the overall appropriation of $9.55 billion reduces to the
net payment. NextWave has never provided commercial mobile services to
the public using the licenses obtained in Auction Nos. 5, 10, and 11.
(a) Required Holding Period
Original C and F block licensees that won licenses at Auction Nos.
5, 10, and 11, generally are not permitted during the first five years
from the date of their initial license grant to assign or transfer
control of their licenses won in closed bidding to entities other than
those that satisfy the entrepreneur block eligibility rules. 47 C.F.R.
Sec. 24.839(a)(1). However, under an exception, entrepreneur block
licensees are permitted to assign or transfer control of C and F block
licenses won in closed bidding to any entity during the first five
years following the date of initial license grant, provided that the
five-year construction build-out requirement has been satisfied. 47
C.F.R. Sec. 24.839(a)(6).
(b) Build-Out Requirements
The PCS rules require that a licensee of a 30 Mhz block must serve
the area covered by its license with a signal level sufficient to
provide adequate service to at least one-third of the population in
that area within five years of being licensed and least two-thirds of
the population in the area within 10 years of being licensed. 47 C.F.R.
Sec. 24.203 (a). A licensee of a 10 MHz or a 15 MHz block must serve
the area covered by its license with a signal level sufficient to
provide adequate service to at least one-quarter of the population in
that area within five years of being licensed, or make a showing of
substantial service in their licensed area within five years of being
licensed. 47 C.F.R. Sec. 24.203(b).
(c) Unjust Enrichment
Ordinarily, if a C or F block licensee that used a bidding credit
assigns or transfers its license within the first five years after the
initial license grant date to an entity that does not qualify for a
bidding credit, or as favorable a bidding credit, the licensee is
subject to an unjust enrichment payment. Specifically, under the
Commission's rules, a licensee that utilizes a bidding credit and that,
during the initial 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. 47 C.F.R.
Sec. 1.2111(d). A licensee that utilizes a bidding credit, and that,
during the initial term, seeks to assign or transfer control of a
license to an entity that is eligible for a lower bidding credit, will
be required to reimburse the U.S. government for the difference between
the bidding credit obtained by the assigning party and the bidding
credit for which the acquiring party would qualify, plus interest. 47
C.F.R. Sec. 1.2111(d).
Similarly, a licensee that utilizes installment payment financing
and seeks to assign or transfer control of its license to an entity
that does not qualify for installment payments will be required to make
full payment of the remaining unpaid principal and any unpaid interest
accrued through the date of assignment or transfer. 47 C.F.R.
Sec. 1.2111(c). A licensee that utilizes installment payment financing
and seeks to assign or transfer control of its license to an entity
that qualifies for a less favorable installment payment plan will be
required to adjust its payment plan to the reflect the new eligibility
status. 47 C.F.R. Sec. 1.2111(c).
For licenses won in Auction No. 5 or 10, where virtually all
bidders were given the same bidding credit, no bidding credit unjust
enrichment payment is required upon transfer of a license to an
entrepreneur that is not a small business within the first five years
after the date of the initial license grant, even if the transferor or
assignor has not yet satisfied its initial construction benchmark
requirement. Amendment of the Commission's Rules Regarding Installment
Payment Financing for Personal Communications Services (PCS) Licensees,
WT Docket No. 97-82, Sixth Report and Order and Order on
Reconsideration, 15 FCC Red 16266, 16291 at n.156 (2000).
(d) Eligible Licensees Or Transferees
For permissible transfers and assignments, the transferor or
assignor would not be required to make unjust enrichment payments upon
early transfer or assignment to the following entities: a transferee/
assignee that qualifies for the same or greater level of bidding
credits; a transferee/assignee that meets the eligibility standards for
the same or more favorable installment payments; and a transferee/
assignee of a license from Auction No. 5 or 10 that is an entrepreneur
and not a small business. See 47 C.F.R. Sec. 1.2111(c), (d); Amendment
of the Commission's Rules Regarding Installment Payment Financing for
Personal Communications Services (PCS) Licensees, WT Docket No. 97-82,
Sixth Report and Order and Order on Reconsideration, 15 FCC Rcd 16266,
16291 at n.156 (2000).
Question 2. Please state which rules, if any, described in your
answers to questions 1 (a), (b), (c), and (d) would need to be waived
by the Commission to effectuate the settlement agreement proposed by
the parties. What statutory provisions, if any, would need to be
amended by Congress?
Response: None of the rules described above would need to be waived
by the Commission to effectuate the Settlement Agreement because
NextWave, pursuant to the settlement, is not transferring its licenses.
Rather, it is agreeing to relinquish any claims to the licenses.
There are several reasons why this legislation is necessary to
effectuate the settlement. First, the proposed legislation ensures that
Congress has approved and authorized the settlement in all respects.
This congressional action is required to ensure that the Commission is
acting fully within its authority. It provides, for example, necessary
budgetary and appropriations authority to the Commission to make
payments to NextWave. Second, the proposed legislation contains a
judicial review provision, patterned on other Acts of Congress, that
provides for expedited review, limited to constitutional claims. Any
challenge to the legislation, the settlement agreement itself, or to
actions taken by the Commission would be funneled into one court of
appeals (the D.C. Circuit) and would be on a fast track for review.
This provides assurance that the American public will receive the
benefits of the settlement with minimum additional litigation delay.
Third, the legislation provides the guarantee necessary for NextWave.
to relinquish its claims on the licenses. In return, NextWave will be
paid once the government receives Auction No. 35 receipts equal to the
payments to be made to NextWave no later than December 31, 2002.
Question 3. For each Auction 35 winner participating in the
settlement, please state whether such winner qualifies for designated
entity status under current Commission rules. Has the Commission
conducted any pre- or post-auction audits to validate these
qualifications? Under the settlement, what can the Commission do if it
subsequently finds, or is made of aware of, information that parties to
the settlement are in violation of the designated entity rules or other
Commission rules with respect to qualifying for such licenses?
Response: To date, the FCC's Wireless Telecommunications Bureau has
qualified all Auction No. 35 winning bidders claiming designated entity
status under the Commission's rules, with the exception of four
applicants. The Bureau engaged in post-auction review of long-form
applications submitted by the winning bidders and, in some cases, has
consulted with winning bidders to review additional documentation
clarifying representations made in the long-form applications. Two of
the remaining bidders (Alaska Native Wireless, L.L.C. and DCC PCS,
Inc.) seeking to qualify as designated entities had their applications
contested on the grounds that they do not qualify. These applications
are restricted under the Commission's ex parte rules. 47 C.F.R.
Sec. 1.1208; see also Petition to Deny filed against DCC PCS by Raymond
J. Quianzon, Jennifer Dine Wagner of Fletcher, Heald, & Hildreth,
P.L.C., counsel for TPS Utilicom (March 9, 2001); Petition to Deny
filed against Alaska Native Wireless, L.L.C. by Raymond J. Quianzon,
Jennifer Dine Wagner of Fletcher, Heald, & Hildreth, P.L.C., counsel
for TPS Utilicom (March 9, 2001).
The Bureau is carefully reviewing the applications of the four
remaining bidders--Alaska Native Wireless, L.L.C.; DCC PCS, Inc.; 3DL
Wireless, LLC; and SVC BidCo, L.P.--to determine whether they qualify
as designated entities. Should the FCC later determine, after licenses
are granted, that a licensee either misrepresented or altered its
designated entity status in a manner inconsistent with the Commission's
rules that licensee would be subject to enforcement action, which could
potentially include revocation of its licenses.
Question 4. The settlement agreement permits certain participating
Auction 35 winners, at their discretion, to withdraw all their bids for
Auction 35 licenses without penalty and receive a refund of all monies
paid to the Government. In the past, has the Commission ever allowed
winning auction bidders to cancel their bids and, if so, under what
circumstances? Were these bidders permitted a full refund of monies
paid? If not, what is the policy justification for this disparate
treatment?
Response: As a general matter, a winning bidder that cancels its
bids is subject to default penalties under the Commission's Rules.
Under the proposed legislation, and because of the unique circumstances
of Auction No. 35, refunds are available to a small group of auction
winners who bid less than $10 million so long as they surrender their
rights to the C and F block licenses in question. This is because of
the length of time between the auction and the award of the licenses,
which creates a particular hardship, on these small bidders who are
having increasing difficulty in accessing the financial markets. The
Wireless Telecommunications Bureau did notify bidders in a Public
Notice in advance of Auction No. 35 that their participation was
subject to the outcome of the litigation, and that monies would be
returned at the conclusion of the litigation if the government lost.
The settlement effectively gives a choice to smaller bidders: sign up
for the settlement and, pledge to pay the amount owed from Auction No.
35 at a future date in exchange for license grant, or walk away from
the transaction now in exchange for return of all deposits.
It should be noted that as part of the C block restructuring
process, the Commission permitted licensees that had acquired licenses
in Auction Nos. 5 and 10 to return their licenses, or portions of their
licenses, in exchange for debt relief. Under four restructuring
options, licensees were permitted to return their licenses or portions
of their licenses (i.e., disaggregated licenses) while money on deposit
was either forfeited or a portion applied toward the purchase of other
licenses in Auction No. 22 (the C block re-auction that followed
restructuring). See Amendment of the Commission's Rules Regarding
Installment Payment Financing for Personal Communications Services
(PCS) Licensees, NW Docket No. 97-82, Second Report and Order and
Further Notice of proposed Rule Making, 12 FCC Red 16436 (1997); see
also Amendment of the Commission's Rules Regarding Installment Payment
Financing for Personal Communications Services (PCS) Licensees, WT
Docket No. 97-82, Order on Reconsideration of the Second Report and
Order, 13 FCC Red 8345 (1998).
Question 5. What action, if any, has the Commission taken on the
Alaska Native Wireless-Verizon-Voicestream petition filed July 19,
2001, to initiate an investigation and audit regarding the eligibility
of NextWave to hold C- and F-Block licenses?
Response: The Wireless Telecommunications Bureau has taken no
action on the Alaska Native Wireless-Verizon-Voicestream petition
pending the outcome of the NextWave litigation and the proposed
settlement.
Question 6. If the Commission has conducted an investigation or
audit of the matters raised in the above petition, what specific
findings has it made? If no investigation or audit has been performed,
please explain why not.
Response: To date, the Wireless Telecommunications Bureau has not
conducted an investigation or entered specific findings with respect to
the issues raised in the Alaska Native Wireless-Verizon-Voicestream
petition. No investigation has been performed because the rights to the
licenses claimed by NextWave have been--and, until certain conditions
of the Settlement Agreement are satisfied, will continue to be--the
subject of pending litigation.
Question 7. Is the Commission satisfied that NextWave is currently
a qualified licensee under the agency's (a) designated entity, and (b)
foreign ownership rules? Please explain the basis for each conclusion.
Have any pre- or post-auction audits been performed to validate such
conclusions?
Response: At the close of the original C block auction in. 1996,
NextWave's applications were contested on the basis that the company
did not qualify as a designated entity and that it violated foreign
ownership limitations under the Communications Act. The FCC's Wireless
Telecommunications Bureau undertook an extensive review of NextWave's
business structure for purposes of determining whether they were
qualified to hold C and F block licenses. The Bureau found that
NextWave qualified as an entrepreneur. However, it also found that the
company exceeded permissible foreign ownership thresholds. The Bureau
later granted NextWave its licenses on the condition that it
restructure to comply with foreign ownership requirements consistent
with the Communications Act and the Commission's rules.
The Wireless Telecommunications Bureau based its original license
grant on an extensive examination of NextWave's ownership structure.
The original license grant was appealed with a proposed settlement
later filed. This is the Antigone-Devco challenge referred to in
Question 12 below. These matters have remained pending due to the
dispute with the government concerning the claim to NextWave's
licenses. (See answer to Question 12 below.) The Commission has
conducted no extensive review of NextWave's ownership structure since
its original 1997 license grants.
Question 8. Has the Commission evaluated NextWave's proposed
financial structure contained in its Second Plan of Reorganization
dated August 6, 2001, to determine whether the company would qualify as
a designated entity under the agency's rules if such plan were adopted?
If so, what conclusions has the Commission drawn? If no evaluation has
been performed, or no conclusions were drawn from such an evaluation,
please explain why not.
Response: The Department of Justice, on behalf of the Commission,
filed objections to NextWave's Second Plan of Reorganization in which,
inter alia, the government reserved to the Commission the jurisdiction
to evaluate NextWave's status as a licensee in light of that Plan,
noting the pending requests before the Commission seeking review of
NextWave's qualifications. (See answers to Questions 5-6, 11-12.)
Because the settlement process has to date superseded pursuit of the
Second Amended Plan, the Commission has not evaluated whether and to
what extent NextWave qualifies as a designated entity under the Second
Plan.
Question 9. Has the Commission evaluated how the proceeds of the
settlement payable to NextWave would be distributed between its control
group and non-control group investors? Would such a distribution comply
with Commission rules and precedents relating to licenses issued
pursuant to Section 309(j) of the Communications Act and subsequently
transferred or assigned? Would such a financial distribution comply
with special Commission rules, if any, relating to licenses transferred
or assigned by designated entities?
Response: The Commission will have no occasion to evaluate how
proceeds of the Settlement will be distributed to NextWave. The
Settlement Agreement requires that NextWave relinquish its claim on the
licenses; therefore, there is no transfer or assignment by NextWave of
the licenses. If there were such a transfer or assignment, the
Commission would apply its rules regarding such transfers by a
designated entity.
Question 10. Does the Commission believe that the instructions of
the D.C. Circuit remand ``for proceedings not inconsistent with this
opinion'' preclude the agency from further consideration of whether
NextWave is a qualified licensee under other applicable Commission
rules? If not, has the Commission undertaken any further proceedings
for this purpose?
Response: No. On August 31, 2001, the FCC's Wireless
Telecommunications Bureau released a Public Notice announcing that it
would update its licensing records in order to comply with the D.C.
Circuit's mandate. The Public Notice emphasized that the United States
and the FCC intended to appeal the D.C. Circuits decision to the
Supreme Court, and that the status of ongoing regulatory proceedings
concerning the licenses in question was not affected by the mandate.
The Public Notice specifically explained that the pending regulatory
proceedings could affect the status of the subject licenses. Those
proceedings remain before the Commission pending implementation of the
settlement.
Question 11. Does the Commission have any reasonable basis to
believe that NextWave may not be entitled to reinstatement of its
licenses (other than the arguments forming the basis for its petition
for writ of certiorari to the U.S. Supreme Court)? If so, please
explain.
Response: Though the Wireless Telecommunications Bureau has
reviewed challenges to NextWave's eligibility (see Question 7 supra),
the full Commission has never ruled on the merits of any of the
objections to NextWave's original license grants. Also, more recently,
petitions have been filed with the Commission challenging NextWave's
eligibility to hold C and F block licenses.\1\ The Petitions allege
that NextWave is in violation of the agency's designated entity and
foreign ownership rules. The proceeding initiated by the petitions has
been deemed restricted under the Commissions ex parte rules.
Accordingly, the agency is prohibited from commenting on the merits of
the proceeding. As stated previously, these matters would be withdrawn
in conjunction with the settlement.
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\1\ See Petition to Initiate an Investigation and Audit Regarding
the Eligibility of NextWave Personal Communications, Inc. and NextWave
Power Partners Inc. to Hold C and F Block licenses, filed by Alaska
Native Wireless, L.L.C., Verizon Wireless, Voicestream Wireless
Corporation, dated July 19, 2001; Petition for Reconsideration, filed
by Alaska Native Wireless, L.L.C. and Voicestream Wireless Corporation,
dated October 12, 2001; Petition to Deny Reinstatement of Licenses
filed by Alaska Native Wireless, L.L.C., and Voicestream Wireless
Corporation, dated August, 30, 2001.
---------------------------------------------------------------------------
Question 12. Why has the Commission failed to rule upon the merits
of the Antigone-Devco petition originally filed on March 17, 1997, or
upon the subsequent request of the parties to withdraw it on June 1,
1998?
Response: Not too long after the Commission received the Antigone-
Devco petition (and the subsequent request for settlement) the
government was engaged in complex bankruptcy litigation with NextWave
raising substantial issues regarding the impact of the bankruptcy
proceedings on the licenses that had been granted to NextWave. The
Commission acknowledged the pending Antigone-Devco challenge and
settlement when it explained its basis for canceling NextWave's
licenses in its 2000 Order, and determined the matters were moot
without reaching their merits. See Public Notice DA 00-49, Auction of C
and F Block Broadband PCS Licenses, NextWave Personal Communications,
Inc. and NextWave Power Partners Inc., Petition for Reconsideration; In
re Settlement. Request Pursuant to DA 99-745 For Various Broadband PCS
C Block Licenses, File Nos. 00341CWL96, et. al., Order on
Reconsideration, 15 FCC Red 17500 (2000). In light of the D.C. Circuit
ruling, the status of these pleadings is in question, but in any event,
these matters would be resolved by implementation the settlement.
Question 13. One of the recipients of frequencies to be
relinquished under the proposed settlement is Voicestream Wireless,
which is effectively owned by Deutsche Telekom. What is the current
level of German government ownership of Deutsche Telekom?
Response: Based on FCC records, the German government currently
owns approximately 43 percent of Deutsche Telekom, which has indirect
ownership of Voicestream Wireless. See Form 602, filed by Powertel,
Inc. November 30, 2001.
Question 14. In its 5th Report and Order (1994), the Commission
adopted rules to fulfill Congress's mandate to ensure that small
businesses, rural telephone companies, and businesses owned by
minorities and women were given the opportunity to participate in the
provision of broadband PCS. Please explain whether, and specifically,
how, the settlement proposed by the parties meets this objective.
Response: The Settlement Agreement affirms the results of Auction
No. 35, which was conducted under the Commission's rules as modified in
August of 2000. Thus, licenses will be assigned to the parties who
would have received them had Auction No. 35 never been challenged. Of
the 35 winning bidders in Auction No. 35, 32 were entrepreneurs. 83
percent of the winning bidders were small or very small businesses, 9
percent of the winning bidders claimed to be minority-owned businesses
and 3 percent of the winning bidders claimed to be women-owned
businesses. (Some of these entities fall into more than one category.)
Section 309(j) of the Communications Act directs the Commission to
disseminate licenses among a wide variety of applicants, including
small businesses, rural telephone companies, and businesses owned by
minorities and women. Rules originally adopted in 1994 to fulfill
Congress' mandate to encourage auction participation by small entities
have been modified over the years to comply with the Supreme Court's
decision in Adarand Constructors v. Pena through the Commission's
normal rulemaking procedures. Most recently, in August 2000, the
Commission released the C/F Block Sixth Report and Order, in which it
changed its C and F block eligibility rules. Specifically, with respect
to Auction No. 35, the Commission determined it would be appropriate to
continue to set aside certain C block licenses for entrepreneurs. These
licenses were made available through ``closed'' bidding. In addition,
the Commission permitted other licenses to be acquired by both
entrepreneurs and non-entrepreneurs through ``open'' bidding. The
Commission also retained bidding credits to enhance auction
participation by small businesses seeking to acquire ``open'' licenses.
See Amendment of the Commission's Rules Regarding Installment Payment
Financing for Personal Communications Services (PCS) Licenses, WT
Docket No. 97-82, Sixth Report and Order and Order on Reconsideration,
15 FCC Rcd 16266 (2000). Section 309(j) of the Communications Act
accords the Commission wide latitude in determining how to achieve the
stated objectives. Section 309(j) does not mandate the use of set-
asides, or any other particular method, to promote the participation of
small businesses in spectrum auctions. With the exception of C and F
block spectrum, the Commission has conducted all of its auctions
without set-asides. Currently, the Commission decides for each service
whether to offer bidding credits to enhance small business auction
participation.
Question 15. The settlement agreement reflects a decision by the
Commission to limit its negotiations to NextWave and participating
Auction 35 winners. Specifically, and as to each of them, please
describe what legal claims of Verizon Wireless or any other party to
the settlement (a) were pending at the time the Commission began
negotiations with them, and (b) are pending now. Please give all
relevant details for each party, including date of filing, stated basis
for the claim, and status on the day negotiations began and status
today.
Response: Schedules C1 and C2 of the Settlement Agreement provide
the requested information, and are attached for your review at Tab 2.
Schedule C1 is a list of pending matters relating to the Antigone-Devco
petition. Schedule C2 is a list of regulatory filings relating to the
Alaska Native Wireless-Verizon-Voicestream petitions. These matters
were pending during the negotiations; however, no member of the FCC's
Office of General Counsel and Department of Justice negotiation team
directly oversees these matters, which are handled in the Wireless
Telecommunications Bureau.
Question 16. Did the Auction 35 rules contain any provisions to
protect the Government from potential claims by Auction 35 winners? If
so, please state these provisions. If not, why not?
Response: Yes. In a Public Notice released prior to Auction No. 35,
the FCC's Wireless Telecommunications Bureau notified potential bidders
that they were responsible for performing their own due diligence with
respect to licenses available in the auction. Specifically, the Bureau
made the following unequivocal statement defining a bidder's obligation
to keep abreast of matters affecting any licenses:
Potential bidders and interested parties should be aware that
various proceedings that may relate to the licenses available
in Auction No. 35 may be pending or subject to further
administrative review before the Commission, including, for
example, waiver requests, petitions for reconsideration, and
applications for review. In addition, certain judicial
proceedings that may relate to the licenses available in
Auction No. 35 are pending or may be subject to further review.
Resolution of these matters could have an effect on the
availability of spectrum included in Auction No. 35 and the
auction is subject to such matters. Some of these matters
(whether before the Commission or the courts) may not be
resolved by the time of the auction. The Commission will
continue to act on matters before it, but it makes no
representations as to the resolution of judicial proceedings.
Potential bidders are solely responsible for identifying
associated risks, and investigating and evaluating the degree
to which such matters may affect their ability to bid on or
otherwise acquire licenses in Auction No. 35.
The Bureau's Public Notice also clarified that the Commission would
``return the payments made by winning bidders of licenses in Auction
No. 35 in the event that such bidders are subsequently required to
surrender licenses won to prior applicants or license holders as a
result of final determinations reached in pending proceedings.'' The
Public Notice stated that the Commission would not pay interest on the
returned payments, as it lacked legal authority to do so. Finally, the
Public Notice made clear that winning bidders of licenses subject to
pending proceedings were still required to meet the normal payment and
construction schedules established by the Commission.
Question 17. You have described the settlement as ``a resolution
that maximizes the public interest.'' We, too, support a public
interest resolution of this matter and are curious as to what public
interest conditions the Commission sought to obtain in the settlement
agreement with the parties. Does the settlement agreement include any
conditions on the companies that will receive relinquished frequencies
that such companies will expedite their deployment of E-911 safety
technology, commit to the rapid deployment of digital capability to
geographic areas within their licensed markets,currently still
predominantly utilizing analog technology, commit to grant free or
discounted service to educational institutions, or commit to anything
else that could be characterized as activity that ``maximizes the
public interest''?
Response: All licensees are expected to comply with the
Commission's rules and any public interest obligations that flow from
our regulations. Auction No. 35 winners are treated no differently in
this regard. The overriding public interest benefit of the settlement,
however, is that it enables the disputed NextWave spectrum to be put to
use after years of hard-fought, legal wrangling, Section 309(j) of the
Communications Act asks the Commission to balance such considerations
when it calls for the rapid deployment of spectrum, and when it
recognizes that the American public should receive a fair portion of
the value of spectrum. 47 U.S.C. Sec. 309(j)(3). The time has come to
put the NextWave spectrum to productive use for the American consumer,
or run the risk that these licenses will further uncertainty while the
litigation continues. These licenses include some of the largest
markets in the United States, where spectrum is in high demand for new
and innovative uses such as Third Generation (3G) wireless. The
settlement paves the way for the spectrum to be put into the hands of
Auction No. 35 participants, who clearly value the licenses the most,
consistent with 309(j). In addition, the U.S. taxpayer will benefit by
receiving approximately $10 billion for the disputed spectrum, nearly
twice the original 1996 bids for the licenses. Also, contrary to the
way licenses were granted to NextWave, monies will be paid in full by
the Auction No. 35 winners, without installment payments, which
significantly reduces the risk of default to the U.S. government.
Question 18. Did the Commission request any such public interest
commitments from parties receiving the NextWave frequencies?
Response: The Commission did not impose any additional public
interest obligations, other than those that are expected from all
licensees, as a condition of settlement.
Chairman Tauzin. Reserving the right to object, I simply
want to indicate for the record that Mr. Dingell and Mr. Markey
discussed with me the process by which this letter was sent to
Mr. Powell.
And I encouraged them to send it, and encouraged obviously
that we get all these answers on the record so that we might
have a full record on this matter as we go forward, and I want
to thank Mr. Markey and Mr. Dingell for their efforts here.
Mr. Markey. Thank you, Mr. Chairman.
Chairman Tauzin. And I do not object, Mr. Chairman.
Mr. Green. I yield back my time, Mr. Chairman.
Mr. Upton. The gentleman's time has expired. Ms. DeGette.
Ms. DeGette. Thank you, Mr. Chairman. Following up on
Congressman Boucher's question, Mr. Hunt. He asked you the
question if you will recall why do you need Congressional
approval of this agreement, and you talked about several
things.
Unfortunately, since this has happened quickly, I have not
had time to personally review the proposed settlement
agreement, and I would like to know if one of the reasons that
you feel that you need Congressional approval is because of the
provisions regarding filing lawsuits, and other types of legal
action that you referred to in your opening statement. And if
so, if you could expand on that a little bit.
Mr. Hunt. Certainly. Yes, that is one of the reasons that
we believe that this legislation is necessary, not only for the
appropriation. And I might just add parenthetically that I
didn't have an opportunity to mention that the Judgment Fund,
which is ordinarily used in settling litigation, would not be
available in this case to guarantee the payment to NextWave.
And that is why the appropriation aspect is necessary.
Ms. DeGette. Okay. If you could answer my question because
I only get 5 minutes.
Mr. Hunt. Certainly. Yes, we think the expedited judicial
review provisions are a necessary component here, because one
of the goals that we have is to get the spectrum into public
use as expeditiously as possible.
Ms. DeGette. And who would those expedited court deadlines
apply to, Mr. Hunt?
Mr. Hunt. Those expedited court deadlines have several
components. One is expedited provisions for courts themselves
in making determinations on any litigation that is filed with
respect to this settlement. There is no mandatory deadline
where Congress is saying to a court----
Ms. DeGette. I was going to say that I don't think that
would go over too well with the Court.
Mr. Hunt. Well, it has actually happened in a number of
Congressional enactments where there have been such
circumstances. And, in fact, as recently as last year the
Supreme Court upheld a determination in Miller v. French that
said that any challenges brought to prison conditions pursuant
to the Prison Litigation Reform Act----
Ms. DeGette. Okay. You know what? Let me ask the Chairman a
couple of questions.
Mr. Hunt. Sure.
Ms. DeGette. Mr. Chairman, you talked a little bit about
the requirements for buildout, and I am wondering what the
specific effect of the bankruptcy filing by NextWave would have
on any requirements.
You talked a little bit about the timetable earlier in
response to Mr. Green's question. I am wondering if the
bankruptcy filing would have any bearing on that?
Mr. Powell. I think the short answer is that it would,
because it would at least give the company an argument that as
a consequence of the bankruptcy proceeding and the uncertainty
and overhang associated with those positions being resolved in
bankruptcy, it has not been able to fully comply as a growing
concern with its buildout obligations. And NextWave would
arguably argue that it should have relief on the buildout
requirements.
Ms. DeGette. And what would the effect of recent increases
in capital to the company that we have been seeing about in
press accounts have on their argument, vis-a-vis the
bankruptcy?
Mr. Powell. It is hard for me to judge. I don't appreciate
the full range of additional capital that you are referring to.
Money alone won't get a network built, and to meet the
aggressive buildout requirements as I mentioned before,
including milestones that are just a month away, I think it
couldn't realistically be obtained no matter how much money
there was available.
Ms. DeGette. Thank you. Now, Mr. Chairman, you had talked
previously about the need to release this spectrum for use by
the public, and I am wondering if you can talk to me more
specifically about how Congress and Congressional approval by
December 31 of this year would help expedite that? What would
be the practical effect of releasing that spectrum?
Mr. Powell. The practical effect is that in the auction
that we held earlier, Auction 35, there are a number of
companies who are prepared to take the spectrum they won and
put it into use in their networks, in essence, right away.
And so by settling the case, and terminating the
litigation, shifting the licenses to those companies, they
would be deployed in networks and available to consumers
relatively soon, probably beginning in the next few months, and
over the next 6 months we would begin to see the benefits of
that spectrum.
Ms. DeGette. And what would happen if Congress didn't
approve this settlement agreement by the end of the year, in
terms of the release of that spectrum to others?
Mr. Powell. I think at a minimum it would not find its way
to public use for a significantly longer period of time,
largely because I think there would be any number of continuing
litigation and regulatory issues that would hold up the
perfection of any licenses for a much more serious period of
time.
Ms. DeGette. Thank you, and thank you, Mr. Chairman.
Mr. Upton. Mr. Engel.
Mr. Engel. Thank you, Mr. Chairman. Chairman Powell, can
you help me understand when--and first of all, greetings. And
can you help me understand when evaluating a bid does the FCC
consider the ability of a company to actually pay for the
license?
Mr. Powell. We don't have an extensive examination of
financial wherewithal. We have a requirement for a substantial
amount of up-front payments when a bidder prevails in order to
demonstrate financial viability to proceed with the perfection
of the license.
Mr. Engel. So does the FCC consult with investment managers
at all who might provide an indication that a bid may be far
more than what a license is worth, and therefore, logically the
necessary capital to build out would be difficult to obtain?
Mr. Powell. No, we don't do that. It would be very
difficult, given that the licenses are auctioned through a
pretty elaborate dynamic and gaming system, and the way that we
try to protect against lack of viability is in the context of
the rules that govern the auctions.
If a company ultimately bids and wins a bid, and then
subsequently has difficulty with the service and obligations,
then that is treated as a potential default and enforcement
remediation--as opposed to an unending examination of financial
resources, which I think we have concluded would be
extraordinarily difficult to examine given the resources that
we have.
Mr. Engel. In view of what has happened, do you think that
policy might change? I mean, what can we do as a committee to
help you with this?
Mr. Powell. Well, I think that we cured the thing that I
think was most responsible for that, which is installment
payments. Regrettably, I think that installment payments were
initiated for good purposes, which was the desire to have
smaller companies, companies with more difficult financial
situations, to be able to pay over time to the U.S. Government
so that they didn't have the shock of up front and immediate
payments.
Regrettably what that did is lead to some overbidding and
the possibility of default, and regrettably it is part of what
had the Courts perceive us as a creditor, as opposed to a
government regulator.
We since have stopped using installment payments, in the
context of auctions, and while there is no requireent of
demonstrated financial wherewithal before even entering the
auction, you are required to pay fairly quickly--I think even
within 10 days of the closure of the auction--substantial
amounts of money in furtherance of your obligation.
Mr. Engel. If you could rebid the spectrum when it is not
used would that be helpful at all?
Mr. Powell. It is helpful and we can in many ways, and that
is what we were endeavoring to do here, which is to reclaim the
right to do just that. And normally we have been able to do
that. We have done that pretty consistently when spectrum isn't
used or benchmarks are failed.
This situation is quite complicated and similarly unique
because what we did is have a bidder run to the bankruptcy
court for protections that were held to bar us from being able
to do it.
Mr. Engel. I know that in your testimony that you mentioned
amending the bankruptcy law. That is obviously something that
this committee--that is not within this committee's
jurisdiction.
What specifically could we do that is in our jurisdiction
to ensure or to make it a little easier for you, and ensure
that this kind of thing does not really happen again?
Mr. Powell. Well, Congressman, as I had mentioned earlier,
on a number of occasions the Commission has tried to advise
what the possibilities of prospective legislation might look
like, and I would be happy to provide you examples of that.
In many ways I would reserve an answer, because I think we
would love to consider and work with what the possibilities of
that are. We have taken what we think are the prudent steps
within our authority to protect against it.
We have yet to see whether that is sufficient protection,
but I do believe that we do have this continuing risk. It could
be addressed either through--potentially either through
Communications Act changes, or bankruptcy code interpretations.
In many ways I yield to Congress' wisdom as to what the
best way to maximize its interests as to those two things are.
Mr. Engel. Well, thank you, Mr. Chairman. Thank you.
Mr. Upton. Mr. Chairman, thank you very much.
Mr. Powell. And thank you.
Mr. Upton. That was very good testimony, and I look forward
to working with you obviously in the future and we appreciate
your time this afternoon.
Mr. Powell. Thank you, sir.
Mr. Upton. We will get prepared for Panel Number 2; Mr.
Denny Strigl, CEO of Verizon Wireless; Mr. Frank Cassou,
Executive VP and General Counsel of NextWave Telecom; and Mr.
Jim Winston, Corporate Secretary of Urban Communicators. If you
would take your place at the table.
Your testimony has been made part of the record in its
entirety, and we will continue to proceed as we did with the
first panel. If you would take no more than 5 minutes for your
opening statements, that would be terrific.
And, Mr. Strigl, we will start with you. Thank you.
STATEMENTS OF DENNIS STRIGL, CHIEF EXECUTIVE OFFICER, VERIZON
WIRELESS; FRANK A. CASSOU, EXECUTIVE VICE-PRESIDENT AND GENERAL
COUNSEL, NEXTWAVE TELECOM, INC.; AND JAMES L. WINSTON,
CORPORATE SECRETARY, URBAN COMMUNICATORS
Mr. Strigl. Thank you very much, Mr. Chairman. And members
of the committee, thank you very much for holding this hearing
today. I am concerned that much of the recent discussion of the
NextWave settlement has focused on lobbyists, on lawyers, and
investors.
And the big picture for the wireless industry and our
economy I think has been somewhat missing from the dialog. I am
not a lobbyist, and I am not a lawyer, or a self-interested
investor.
I am a wireless network operator who has come before this
subcommittee for actually the third time in 18 months to talk
about the critical need for more radio spectrum. Radio
spectrum, of course, being the life blood of the growing
wireless communications business.
In many ways, I am here today, Mr. Chairman, and committee
members, to deliver the same message. I believe that the
legislation proposed by the Administration is strongly in the
public interest.
Why? First, the proposed legislation ends 5 years of legal
controversies that have prevented this spectrum from being put
into use. Continuing the legal fight in my opinion is not at
all productive.
Even assuming that the FCC could win every legal battle
going forward, renewed litigation in the Supreme Court and the
D.C. Circuit Court would take at least as you have heard 2 or 3
more years.
Second, the proposed legislation will benefit customers and
this is because the additional spectrum is needed by carriers
to introduce new wireless services in new markets and to
fortify existing systems that are currently approaching
capacity limits in the major markets across the United States.
And we would also use this spectrum to roll out high speed
wireless data services. Third, the proposed legislation will
stimulate investment and it will create jobs. Verizon Wireless
will invest billions of dollars over the next 5 to 7 years for
infrastructure and for additional network capacity to use the
NextWave spectrum.
Assuming other auction winners make proportionate similar
investments, the settlement will yield a substantial stimulus
to the economy. The wireless carriers, equipment manufacturers,
and others involved in building out infrastructure will create
thousands of good paying jobs across this country.
And then the proposed legislation produces net receipts of
$10 billion for the U.S. Treasury in fiscal year 2002. Without
the settlement and the authorizing legislation, the licenses
would create few receipts this year under NextWave's
installment payments.
And U.S. taxpayers would lose the benefit of the much
higher prices that prevailed earlier in the year when the
auctions were concluded. The effect for fiscal year 2002 would
actually be a negative outflow of funds if we do not have the
legislation, because without the settlement the Treasury would
have to immediately refund more than $3 billion of deposits to
the Auction 35 winners.
There has been a suggestion that Congress should not act on
the proposed legislation because there may be bankruptcy
related or other problems affecting past or future auctions. I
urge the subcommittee to take advantage of the solution at
hand.
This settlement, and the authorizing legislation, can avoid
several more years of legal limbo for these licenses and the
licenses of course could be put into effect immediately for the
use of the American public.
Putting to use almost $16 billion worth of spectrum across
40 States now rather than later, I would say is a pretty good
days work. And on a separate track with respect to the problem
presented by bankruptcies in the future and spectrum auctions,
Verizon Wireless will happily work with Congress in crafting a
solution.
The legal context for this settlement in the authorizing
legislation are detailed in the attachment to the testimony
that I am submitting today, but more than 5 years have now
elapsed since the FCC's original auctions awarding the NextWave
licenses.
And absent a settlement the litigation could continue for
another 2 or 3 years, or even longer, because it is now
doubtful that the Supreme Court could hear the case at all in
this term.
Facing that prospect, the FCC, the Department of Justice,
NextWave, and winners of the Auction 35 licenses, are anxious
to bring certainty, and the uncertainty of prolonged litigation
actually is a major problem for businesses and for consumers
alike.
The settlement agreement is the product of lengthy and
intensive negotiations among many public and private parties
whose interests it affects. The parties attempted to negotiate
a settlement that did not require authorizing legislation.
But in the end the only structure to which the parties
could find common ground does require the legislation that you
now find before you. To achieve its objectives in a timely way,
the proposed legislation includes specific instructions to the
courts to dispose promptly of any judicial challenges to the
settlements, or to the legislation itself.
Those instructions are warranted to put behind us 5 years
in which this spectrum has laid fallow. Those provisions are
fully respectful of the independence of the judiciary, and have
ample precedent in prior legislation.
In summary, I urge the subcommittee to do everything it can
to move this legislation through Congress before the end of the
year. It is the best result for the industry, and we believe
for the economy.
To that end, I appreciate the subcommittee's promptly
holding hearings, and again I thank the subcommittee for the
opportunity to appear before you today.
[The prepared statement of Dennis Strigl follows:]
Prepared Statement of Dennis Strigl, Chief Executive Officer, Verizon
Wireless
Mr. Chairman, and members of the Committee, thank you for holding
this hearing today. I am concerned that much of the recent discussion
of the NextWave settlement has focused on the lobbyists, lawyers, and
investors. The big picture for the wireless industry and our economy
has been missing from the dialogue. I'm not a lobbyist, lawyer, or
self-interested investor. I'm a wireless network operator that has come
before this Subcommittee for the third time in 18 months to talk about
the need for more radio spectrum--the lifeblood of the growing wireless
communications business. In many ways, I'm here today to deliver the
same message.
I believe the legislation proposed by the Administration is
strongly in the public interest:
The proposed legislation ends five years of legal
controversies that have prevented this spectrum from being put
to use. Continuing the legal fight is not productive. Even
assuming that the FCC would win every legal battle going
forward, renewed litigation in the Supreme Court and the D.C.
Circuit would take at least two or three more years.
The proposed legislation will benefit consumers. This is
because the additional spectrum is needed by carriers to
introduce wireless service to new markets, to fortify existing
systems that are approaching capacity limits in major markets,
and to roll out high-speed wireless data services.
The proposed legislation will stimulate investment and create
jobs. Verizon Wireless will invest billions of dollars over the
next 5 to 7 years for infrastructure and additional network
capacity to use the NextWave spectrum. Assuming other auction
winners make proportionately similar investments, the
settlement will yield a substantial stimulus to the economy.
The wireless carriers, equipment manufacturers, and others
involved in building out the infrastructure will create
thousands of good-paying jobs across the country.
The proposed legislation produces net receipts of $10 billion
for the U.S. Treasury in fiscal year 2002. Without the
settlement and the authorizing legislation, the licenses would
generate few receipts this year under NextWave's installment
payments, and U.S. taxpayers would lose the benefit of the much
higher prices that prevailed in the reauction of the licenses.
The effect in fiscal year 2002 would actually be a negative
outflow of funds, because without the settlement the Treasury
would have to immediately refund more than $3 billion of
deposits to the Auction 35 bidders.
There has been a suggestion that Congress should not act on the
proposed legislation because there may be bankruptcy-related or other
problems affecting past or future auctions. I urge the Subcommittee to
take advantage of the solution at hand. This settlement and the
authorizing legislation can avoid several more years of legal limbo for
these licenses that can be working for the American people. Putting to
use almost $16 billion worth of spectrum across 40 States now--rather
than later--is a pretty good day's work. And on a separate track, with
respect to the problem presented by bankruptcies in future spectrum
auctions, Verizon Wireless will be happy to work with Congress in
crafting a solution.
The legal context for this settlement and the authorizing
legislation are detailed in the attachment to this testimony. More than
five years now have elapsed since the FCC's original auctions awarding
the licenses to NextWave. Absent a settlement, the litigation could
continue for another two or three years or even longer, because it is
now doubtful that the Supreme Court could hear the case this term.
Facing that prospect, the FCC, the Department of Justice, NextWave, and
winning bidders from the FCC's January 2001 reauction have negotiated a
settlement agreement that is intended to avoid the uncertainty of
prolonged litigation and ensure that the spectrum covered by NextWave's
licenses will finally be put to use.
The settlement agreement is the product of lengthy and intensive
negotiations among many public and private parties whose interests it
affects. The parties attempted to negotiate a settlement that did not
require authorizing legislation but in the end the only structure on
which the parties could find common ground does require the legislation
that you now find before you.
To achieve its objectives in a timely way, the proposed legislation
includes specific instructions to the courts to dispose promptly of any
judicial challenges to the settlement or to the legislation itself.
Those instructions are warranted to put behind us five years in which
this spectrum has lain fallow. Those provisions are fully respectful of
the independence of the judiciary and have ample precedent in prior
legislation.
In summary, I urge the Subcommittee to do everything it can to move
this legislation through Congress before the end of the year. It is the
best result for the industry and the economy. To that end, I appreciate
the Subcommittee's promptly holding this hearing and again, I thank the
Subcommittee for the opportunity to appear before you today.
Attachment
legal context of the settlement
More than six decades ago, Congress determined that the public
airwaves are a valuable and scarce resource that must be allocated by
the Government for the temporary, exclusive use of particular persons.
Since that time, it has vested in the FCC exclusive authority to make
spectrum allocations. From the beginning, the guiding statutory
standard for issuance of licenses has been, as it remains, ``public
convenience, interest, or necessity.'' 47 U.S.C. Sec. 307(a).
The FCC has used different means for allocating spectrum to serve
the public interest, including comparative hearings and lotteries. In
1993, Congress added Section 309(j) to the Communications Act to
authorize the use of auctions. Congress found that a competitive
bidding system would (1) ensure that spectrum is used more productively
and efficiently than if handed out for free; (2) speed delivery of
services; (3) promote efficient and intensive use of spectrum; (4)
prevent unjust enrichment (to a lottery winner, for example); and (5)
produce revenues for the American people. H.R. Rep. No. 103-111, at
246-253 (1993).
Section 309(j) makes clear, however, that revenue raising must take
a back seat to the FCC's continuing duty to select the best user of the
spectrum. Thus, Congress required the FCC to adopt safeguards to
protect the public interest and to promote, among other goals, the
dissemination of licenses to a ``wide variety'' of owners, including
small businesses. 47 U.S.C. Sec. 309(j)(3). Congress required the FCC
to consider installment-payment methods to implement this goal, and
Congress restricted the FCC's ability to consider the ``expectation of
Federal revenues'' in designing authorized auctions. 47 U.S.C.
Sec. Sec. 309(j)7)(B), 309(j)(4)(A). In addition, Congress provided
that the FCC's new auction authority does not otherwise affect any
provisions of the Communications Act and that the FCC's licensing
decisions are to be governed by the public interest, convenience, and
necessity. In particular, Congress specified that the auction-related
provisions of the Act do not diminish the Commission's authority to
regulate or reclaim spectrum licenses, and do not convey any rights,
including any expectation of renewal of a license, that differ from the
rights of other licenses within the same service that were not issued
via auctions. 47 U.S.C. Sec. 309(j)(6).
In implementing its new auction authority, the FCC concluded that
designing auctions to award licenses to the parties that value them
most highly (as evidenced by their commitment to pay the most) will
best achieve the congressional goals noted above. The FCC also adopted
installment-payment programs to implement the express congressional
directive to promote dissemination of licenses among a wide variety of
owners, including small businesses, as one facet of identifying who
would be the best users of the public spectrum overall.
When the FCC conducted a series of auctions from 1995 through 1997
for the right to use certain broadband PCS spectrum, NextWave (that is,
NextWave Personal Communications Inc. and its affiliates) was the
winning bidder for spectrum in 63 markets by submitting high bids
totaling $4.74 billion, which NextWave, as a small business, would pay
over a ten-year period under the FCC's installment payment program. The
FCC issued the 63 licenses to NextWave in early 1997, subsequent to the
express condition that failure to make a scheduled payment would result
in automatic cancellation. Almost immediately, however, NextWave and
winning bidders for other licenses, finding it hard to obtain
financing, asked the FCC for relief from their obligations. The FCC
suspended installment payments while it considered the matter, but
ultimately gave licensees only a limited set of ``restructuring''
options, stressing the importance of avoiding changes that would impair
the integrity of the auctions process and would be unfair to losing
bidders in the auctions. The FCC's adoption of the restructuring
options was upheld by the D.C. Circuit.
The NextWave Litigation
On June 8, 1998, the day that PCS licensees were required to elect
among these ``restructuring'' options, NextWave, rather than make an
election, filed a petition for reorganization in bankruptcy. NextWave's
next installment payment was due at the end of October 1998, but it
failed to make that payment, thus triggering the express automatic
cancellation condition on its licenses. NextWave, however, began
litigating in the bankruptcy court to keep its licenses while avoiding
its obligations to make full and timely payment, by asserting a claim
of ``fraudulent conveyance'' under Section 544 of the Bankruptcy Code,
11 U.S.C. Sec. 544, based largely on an asserted decline in the value
of the licenses since the auctions.
NextWave's bankruptcy filing has spawned years of litigation, which
has focused on the FCC's right to reclaim spectrum from bankrupt
licensees who are unable to meet the payment conditions imposed on
their licenses. From the outset, the bankruptcy court framed the issue
as whether the FCC's challenge to NextWave's plan of reorganization
sought to adjudicate the FCC's rights as a creditor under the
Bankruptcy Code (in which case the bankruptcy court could adjudicate
the matter), or the FCC's rights as a regulator (in which case it could
not). The bankruptcy court concluded that only creditor interests were
at issue and ruled in NextWave's favor; the district court affirmed,
allowing NextWave to retain the licenses while reducing NextWave's
payment obligation from $4.74 billion to $1.02 billion.
The Second Circuit reversed that decision. It rejected the
bankruptcy court's view that the FCC's rights to enforce the license
conditions against a bankrupt licensee were limited to those of a
traditional creditor. Instead, the Second Circuit described the
congressional commitment to the FCC (not any court) of exclusive
authority over spectrum and the noncreditor regulatory interests behind
auctions as spectrum allocation tools. Accordingly, the Second Circuit
held that the bankruptcy court lacked authority to order remedies that
abrogate the FCC's licensing authority. The Second Circuit further held
that NextWave became obliged at the close of the auction, when what it
was buying was worth what it bid, thus defeating NextWave's efforts to
reduce the debt.
When the case returned to the bankruptcy court, market conditions
had changed, bringing a substantial increase in the value of the
NextWave licenses and NextWave was therefore able to propose a
reorganization plan providing for full payment of its obligations to
the FCC. The FCC, however, announced that NextWave's licenses had
automatically cancelled when the October 1998 payment was missed, and
proposed to re-auction the spectrum. The bankruptcy court issued an
order declaring the FCC's reauction notice null and void, citing the
automatic stay and other provisions of the bankruptcy code, 11 U.S.C.
Sec. Sec. 362, 1123, 1124. The Second Circuit again reversed. The
Supreme Court denied NextWave's petitions for certiorari from both
Second Circuit decisions.
In January 2001, the FCC completed its reauction of NextWave's
licenses. In the reauction--dubbed Auction 35--21 companies seeking
access to spectrum that has grown increasingly scarce bid a total of
approximately $15.8 billion--more than three times what NextWave had
originally bid for the spectrum.
The D.C. Circuit's Decision
NextWave next appealed the FCC's public notice announcing the
reauction of its licenses to the D.C. Circuit. Like the bankruptcy
court and the Second Circuit, the D.C. Circuit was asked to consider
whether the FCC's license cancellation was prohibited by Section 525 of
the Bankruptcy Code, which forbids any governmental unit to ``deny,
revoke, suspend, or refuse to renew a license'' to a person that ``is
or has been a debtor'' under Chapter 11 of the Bankruptcy Code solely
because such debtor was insolvent before the bankruptcy case was filed
or has not paid a debt that is dischargeable in bankruptcy. 11 U.S.C.
Sec. 525(a). The D.C. Circuit held that, because the FCC's license
cancellation was triggered by NextWave's failure to make the required
payments, the cancellation fell within these automatic stay provisions
of the Bankruptcy Code. The D.C. Circuit invalidated the cancellation,
returning the spectrum to NextWave.
The FCC, Verizon, and certain other wireless carriers have
petitioned the Supreme Court asking that they review the D.C. Circuit's
decision. That petition is pending.
The Settlement Agreement
More than five years now have elapsed since the FCC's original
auctions awarding the licenses to NextWave. Absent a settlement, the
litigation could continue for another two or three years or even
longer, because it is now doubtful that the Supreme Court if it grants
certiorari could hear the case this term and because there are other
issues raised by NextWave that would be heard on remand from the
Supreme Court even if the Court reversed the D.C. Circuit concerning
Section 525. Facing that prospect, in the aftermath of the D.C.
Circuit's decision, the FCC, the United States Department of Justice,
NextWave, and winning bidders from the FCC's January 2001 reauction
have negotiated a settlement agreement that is intended to avoid the
uncertainty of prolonged litigation and ensure that the spectrum
covered by NextWave's licenses will finally be put to use.
The settlement agreement is the product of weeks of intensive
negotiations among many public and private parties whose interests it
affects. The parties attempted to negotiate a settlement that did not
require authorizing legislation but in the end the only structure on
which the parties could find common ground does require the legislation
that you now find before you.
To achieve its objectives in a timely way, the proposed legislation
includes specific instructions to the courts to dispose promptly of any
judicial challenges to the settlement or to the legislation itself.
Those instructions are warranted by the need to put behind us the five
years in which this spectrum has lain fallow. Those provisions also are
fully respectful of the independence of the judiciary and have ample
precedents in prior legislation.
Mr. Upton. Thank you.
Mr. Cassou.
STATEMENT OF FRANK CASSOU
Mr. Cassou. Thank you, Mr. Chairman, and members of the
committee. I would like to begin by thanking this committee for
the oversight it has devoted to C-Block issues. The committee
as a whole and many of its members have spent considerable time
to give NextWave and other C-Block companies an opportunity to
tell our side of the story.
You have held hearings, and advocated legislative
solutions, and exerted strong leadership on C-Block policy
matters. NextWave has been treated very fairly here, and we are
sincerely grateful.
As the committee has heard this afternoon, there is a
proposed settlement of a controversy that has clouded
NextWave's bankruptcy reorganization. Mr. Chairman, to
appreciate the fairness of this settlement, it is important to
understand what has happened to NextWave over the past 6 years.
NextWave has been attempting to enter the wireless market
as a new competitor since 1995. The company was formed then by
a group of experienced telecommunications executives, with an
innovative plan to provide wireless services on a wholesale
basis.
NextWave was granted spectrum licenses by the FCC in 1997,
after a thorough investigation of our qualifications. At that
time, the FCC's wireless bureau certified unequivocally that
NextWave was in compliance with all designated entity
requirements.
We have remained in compliance ever since. Moreover,
NextWave's foreign ownership has fallen to a modest level well
below the 25 percent threshold established in the
Communications Act.
In 1997, and in 1998, NextWave made great progress in
raising hundreds of millions of dollars to finance its $500
million payment to the FCC in the initial buildout of its
network.
The company hired over 600 employees and contractors,
opened 22 offices, and secured more than $2 billion in
financing commitments from major vendors. The company cleared
microwave lengths, and acquired cell sites.
We had test systems operating in four major markets.
Indeed, the first call made on our network was placed to the
FCC by the distinguished former chairman of this committee,
Thomas Bliley.
Unfortunately, spectrum values declined dramatically during
1997 for reasons that were unforeseeable. As a result,
financing sources dried up, and the company's financial
position deteriorated, but the company did not run to the
bankruptcy court.
It fought off insolvency for more than a year, but it was
forced to lay off more than 500 employees and contractors and
had accumulated more than $400 million in debt to creditors.
To preserve the assets for the benefit of creditors and to
sustain the company as an ongoing venture, NextWave was finally
forced to seek bankruptcy protection in June 1998. Indeed, it
had a legal duty to do so.
The committee is familiar with the litigation that has
followed, but what it may not be familiar with is NextWave's
repeated efforts, continuing to the present, to settle the
litigation and to operate as a wireless carrier.
In January of 2000, NextWave proposed a plan of
reorganization that would have paid the FCC and other creditors
in full, and enabled NextWave to emerge from bankruptcy with
sufficient capital to build out its network.
The FCC blocked the plan and despite repeated assurances to
NextWave that its licenses would not cancel if it deferred
payment while reorganizing, the FCC announced in January of
2000 that it was canceling the licenses.
In August of this year, following the D.C. Circuit decision
giving NextWave back its licenses, NextWave submitted a new
plan of reorganization that included approximately $5 billion
in financing commitments, enough again to pay all creditors in
full, and enable NextWave to build out its network.
NextWave employees are currently working with contractors
building out the markets, the network in 95 markets. Even with
this settlement, NextWave intends to operate its remaining
licenses in markets such as Detroit and Madison, Wisconsin.
All that brings us to where we are today, to the
settlement. The settlement is a fair compromise, and the
benefits are clear, but that this is not a windfall for anyone.
Each party is giving up something.
It is important to understand what NextWave is giving up;
loss of past opportunity. As I mentioned, in January of 2000,
NextWave proposed to plan a reorganization that would have
allowed it to emerge from bankruptcy and would have paid the
FCC in full for NextWave's license obligations.
Had the FCC not blocked that plan, NextWave would be fully
operational today, providing service across the country. By way
of comparison, another wireless carrier, Voice Stream, which
has a national footprint comparable to that of NextWave, was
sold for $29 billion after a little over 2 years of operation.
That opportunity has already been taken from NextWave loss
to the present value of this spectrum, and as a result of the
D.C. Circuit's ruling in June of this year, NextWave's licenses
were reinstated for use by the company.
The FCC's reauction of those licenses established their
market value at $15.85 billion. NextWave's present obligation
to the FCC for those licenses is approximately $1 billion in
2002, plus another $4 billion payable over the next several
years.
Loss of future opportunity. Under the settlement, NextWave
is being asked to forego the opportunity to proceed with its
current plan of reorganization. Based on the value that the
market has placed on the spectrum alone, it is likely that
NextWave would become a company of significant value in the
near future.
NextWave's payment is significant, but it is not a
windfall. The settlement enables much larger additional
payments to taxpayers, in excess of $10 billion, twice the
amount that NextWave originally bid on the licenses, and more
than 10 times the amount that would otherwise be received from
nextwave in 2002.
The settlement also avoids further delays in the use of the
spectrum. I hope that this testimony has been helpful and I
urge the committee to approve the settlement agreement.
[The prepared statement of Frank Cassou follows:]
Prepared Statement of Frank Cassou, Executive Vice President & General
Counsel, NextWave Telecom Inc.
introduction
Thank you, Mr. Chairman; Members of the Committee. My name is Frank
Cassou. I am the Executive Vice President and General Counsel of
NextWave Telecom Inc. I joined NextWave in February 1996, and have
played an active role since then in the Company's attempts to acquire,
pay for, and build out broadband PCS licenses.
I would like to begin by thanking this Committee for the oversight
it has devoted to C block issues. The Committee as a whole, and many of
its Members individually, have spent considerable time and energy in
recent years to provide NextWave and other C block companies an
opportunity to voice our concerns and tell our side of the story. You
have held hearings, advocated legislative solutions, and exerted strong
leadership on C block policy matters with your colleagues and with the
FCC. NextWave has been treated very fairly here, and we are sincerely
grateful.
I come before you today to report that after years of conflict,
there is a proposed consensual resolution of the primary legal
controversy that has clouded NextWave's bankruptcy reorganization. The
proposed settlement will end long-running litigation, generate $10
billion in payments to taxpayers, allow consumers to access radio
spectrum that has been tied up in the litigation, and provide the
foundation from which the NextWave can complete its bankruptcy
proceedings and emerge reorganized and able to proceed with its
remaining business.
background
NextWave was formed in 1995 by a group of experienced
telecommunications executives, including the former President of the
wireless business at QUALCOMM, Inc., to participate as a designated
entity in the auctions and implement an innovative business plan as a
nationwide ``carrier's carrier,'' providing wireless services on a
wholesale basis at far lower rates than anything available at that
time. At the conclusion of the C Block auctions in May and July 1996,
NextWave was designated the high bidder for 63 licenses and timely made
its $474 million down payment on such C Block licenses. NextWave then
executed promissory notes for the remaining amounts due to purchase its
C Block licenses.1
---------------------------------------------------------------------------
\1\ In subsequent auctions, NextWave was the high bidder for 27 F
Block licenses and made timely down payments on those licenses of
approximately $25 million.
---------------------------------------------------------------------------
NextWave was granted spectrum licenses by the FCC in 1997, after a
thorough investigation of our qualifications. At that time, the FCC's
Wireless Telecommunications Bureau certified unequivocally that
NextWave was in compliance with all of the Commission's ``Designated
Entity'' requirements. The Company has remained in compliance ever
since. By virtue of our Chapter 11 filing in 1998, NextWave's
fundamental corporate structure and ownership have been in a state of
suspended animation. Nothing has occurred since the original license
grant that would cause us to fall out of compliance. Moreover,
NextWave's current foreign ownership is de minimus; well below the 25
percent threshold established in the Communications Act.
NextWave moved quickly to implement its business plan and raised
more than $600 million to finance its down payments to the FCC and the
initial build-out of its network. By early 1997, NextWave had hired
over 600 employees and contractors, and had opened 22 offices across
the country. NextWave also secured more than $2 billion in financing
commitments from major vendors for deployment of network equipment.
Within months, NextWave had ninety percent of the microwave links
needed to launch service, had acquired seven switch sites, designed
more than 1300 cell sites, signed more than 300 site leases, and
negotiated an additional 900 leases. NextWave expected to begin
commercial service in four markets by late 1997, and had completed
network engineering designs for 22 of its major markets, including New
York, Los Angeles, Chicago, and Boston. NextWave had also obtained
airtime purchase commitments for in excess of 35 billion minutes of
use.
Unfortunately, spectrum markets declined dramatically during 1997,
primarily due to the availability of additional spectrum that was made
available through auction, at the very time NextWave was attempting to
raise capital and launch service.
Despite its efforts to remain solvent, NextWave was forced to
curtail its operations, laying off more than 500 employees and
contractors. By this time, NextWave owed (in addition to its FCC
obligations) more than $400 million to creditors, and faced attachment
proceedings and other litigation across the country. To preserve assets
for the benefit of creditors, to sustain the company as an ongoing
venture and to fulfill our fiduciary duties, NextWave was forced to
seek bankruptcy protection. We did so only after exploring every
alternative. The decision to initiate Chapter 11 proceedings was
approved by our Board of Directors, including our outside directors,
Allan E. Puckett, the former Chairman and CEO of Hughes Aircraft
Company, and William H. Webster, the former Director of the CIA and
FBI.
On June 8, 1998, NextWave filed for relief under Chapter 11 of the
Bankruptcy Code. Pursuant to Sections 1107(a) and 1108 of the
Bankruptcy Code, the NextWave have operated their businesses and
managed their properties as debtors-in-possession.
Litigation Between NextWave and the FCC
Following extended litigation in the Bankruptcy Court and the
Second Circuit, NextWave prepared to emerge from bankruptcy and. Aided
by improved market conditions, and with the aid of the breathing space
the Bankruptcy Code provides, NextWave submitted a plan of
reorganization in December 1999. That plan would have cured all alleged
defaults in installment payments to the FCC, permitted NextWave to meet
all FCC obligations going forward, and paid all creditors in full,
including interest and late fees. Indeed, NextWave went further and
offered to make an immediate cash payment to the FCC of $4.3 billion--
thereby paying for the licenses seven years earlier than required. 244
B.R. at 262. The plan was set for confirmation on January 21, 2000. Had
that plan been confirmed, NextWave would have been a bankruptcy success
story, having paid its creditors in full while retaining sufficient
capital to realize its goal of building out its nationwide network.
As a result of FCC actions, however, that plan was never confirmed.
On January 12, 2000, the FCC issued a Public Notice declaring that the
NextWave' C and F Block licenses were cancelled retroactively to
January 1999 due to a failure to make postpetition installment payments
while NextWave reorganized its business. In response to the Public
Notice, NextWave pursued two parallel courses with respect to the
Public Notice: (i) in the Bankruptcy Court and, on appeal, in the
Second Circuit; and (ii) in the Court of Appeals for the District of
Columbia Circuit (the ``D.C. Circuit'').
In response to an Order to Show Cause filed by the NextWave seeking
to void the Public Notice, the Bankruptcy Court found that the
attempted cancellation of the C and F Block licenses was ineffective
due to, inter alia, certain provisions of the Bankruptcy Code and it
termed the FCC's purported cancellation ``shocking'' and ``offensive to
due process.'' Subsequently, however, in response to a petition for
writ of mandamus filed by the FCC, the Second Circuit found that
bankruptcy courts lack jurisdiction to review regulatory actions such
as the Public Notice. Specifically, the Second Circuit opined that
``[e]ven if the bankruptcy court is right on the merits of its
arguments against revocation,'' that court simply ``lacked jurisdiction
to declare the Public Notice null and void on any ground: that the
Public Notice violated the automatic stay, that the right to cure
obviates any default, or that the government was estopped.'' In re FCC,
217 F.3d 125, 139 (2nd Cir. 2000). The Second Circuit emphasized that
``NextWave remains free to pursue its challenge to the FCC's regulatory
acts'' in the D.C. Circuit, id. at 140, and refrained from commenting
``on the prospects'' of any such appeal. Id. at 129.
On February 11, 2000, NextWave filed a petition for reconsideration
of the Public Notice with the FCC. On September 6, 2000, the Commission
denied the reconsideration petition, and, shortly thereafter, scheduled
NextWave's licenses for reauction on December 12, 2000 (such reauction
referred to hereinafter as ``Auction 35''). NextWave vigorously opposed
the FCC's actions seeking unsuccessfully to stay the reauction until
after the D.C. Circuit had ruled on the merits of its claims.
Following the D.C. Circuit's denial of the stay, NextWave pursued
an appeal of the FCC's cancellation in the D.C. Circuit. In that
appeal, the NextWave asserted, as it had before the Bankruptcy Court,
that cancellation of the C and F Block licenses violated several
provisions of the Bankruptcy Code, including Sec. Sec. 362, 525, 1123
and 1124, as well as established principles of due process and fair
notice.
On June 22, 2001, the D.C. Circuit issued a ruling on the NextWave'
appeal, reversing the FCC's purported cancellation and holding that
cancellation of NextWave's C and F Block licenses violated Section
525(a) of the Bankruptcy Code (the ``D.C. Circuit Opinion''). Section
525(a) provides, in relevant part, that a ``governmental unit may not .
. . revoke . . . a license . . . to . . . a bankrupt . . . solely
because such bankrupt . . . has not paid a debt that is dischargeable .
. . under this title.'' The D.C. Circuit reversed the Commission's
purported cancellation concluding that the FCC had violated the
Bankruptcy Code when it revoked NextWave's licenses solely because
NextWave had not paid a dischargeable debt. The Court stated:
``Applying the fundamental principle that federal agencies must obey
all federal laws, not just those they administer, we conclude that the
Commission violated the provision of the Bankruptcy Code that prohibits
governmental entities from revoking debtors' licenses solely for
failure to pay debts dischargeable in bankruptcy.'' The D.C. Circuit
made clear that the FCC had effectively sought a ``regulatory purpose''
exception to that prohibition, but that Congress had not created such
an exception. 254 F.3d at 151.
On August 6, 2001, the FCC filed a motion asking the D.C. Circuit
to stay the issuance of the mandate pending the Commission's filing a
petition for a writ of certiorari in the United States Supreme Court.
On August 23, 2001, the D.C. Circuit denied the Stay Motion, noting
that ``the FCC has not demonstrated that the petition would present a
substantial question'' warranting Supreme Court review.
On August 30, 2001, the D.C. Circuit issued its mandate, thereby
formally concluding the proceedings before it. On August 31, 2001, the
FCC issued a Public Notice announcing that it had returned the
NextWave' licenses to active status.
Shortly after the D.C. Circuit opinion, NextWave filed a second
plan of reorganization. As did the first plan, this second plan
provided for payment in full of all creditors, including the FCC. The
plan contained financing commitment of approximately $5 billion to find
the build-out and commercial launch of a nationwide wireless 3G
network.
On October 19, 2001, the FCC filed a petition for writ of
certiorari with the United States Supreme Court requesting review of
the D.C. Circuit Opinion. Certain of the high bidders in Auction 35
also filed certiorari petitions with the Supreme Court. Given the
proposed settlement agreement, NextWave requested and received a sixty
day extension of the time within which to respond to such petitions. It
is contemplated under the settlement agreement that the petitions for
certiorari will be withdrawn at the time the FCC receives the C Block
and F Block licenses.
Auction 35 and Intervention by Wireless Carriers
As indicated above, following the issuance of the Public Notice,
the FCC scheduled and held Auction 35 which, while it included certain
other licenses, was primarily a reauction of NextWave's C and F Block
licenses. The 30 MgHz C Block licenses held by NextWave were divided
into three 10 MgHz licenses and bidders for certain of those 10 MgHz
licenses were not limited to designated entities. Further, Auction 35
was specifically held subject to resolution of the litigation with
NextWave over the C Block and F Block licenses. Even taking into
account these factors, however, the results of Auction 35 indicated
that the market value of spectrum had significantly increased during
1999-2001. The aggregate bids for NextWave's licenses were $15.85
billion. Alaska Native Wireless (``ANW''), Verizon Wireless
(``Verizon''), Salmon PCS (``Salmon''), and VoiceStream Wireless
(``VoiceStream'') were responsible for over $13.72 billion of such
bids.
nextwave's commitment to building out its network
NextWave's goal has always been to be a nationwide provider of
wholesale wireless telecommunication services. After being declared the
high bidder in the C Block auctions, raised $600 million and secured
more than $2 billion in financing commitments in an effort to create a
nationwide wireless network. Throughout the bankruptcy cases, NextWave
has continued to work toward this goal and on several occasions has
sought to confirm a plan of reorganization providing significant
present and/or future value to its creditors and equity interest
holders--many of whom invested money or services in NextWave in 1996 or
1997. In December 1999, NextWave proposed a plan that would fully cure
and reinstate the FCC's claims and pay other creditors amounts owed as
of the bankruptcy filing, while permitting NextWave to complete, the
build-out of a nationwide wireless network within 12 to 18 months. That
Plan was, however, subsequently abandoned when the FCC announced the
cancellation of NextWave's licenses. Notwithstanding the disruptions to
the reorganization process throughout the course of the bankruptcy
proceedings, NextWave has proceeded to the extent possible with the
build-out of the network. For example, network architecture and
preliminary radio frequency designs are completed for the top 40
markets. In June 2001, NextWave obtained court approval for debtor-in-
possession financing sufficient to achieve initial build-out of all of
its markets with a full commercial build in the D and E markets. This
build-out has continued with the signing of vendor contracts and the
purchase and installation of base stations and switches in certain
markets.
Following the DC Circuit Opinion, NextWave filed a new plan of
reorganization, this time backed by financing commitments of
approximately $5 billion, to pay in full all creditors, including the
FCC, to fund the build-out and commercial launch of a nationwide
wireless 3G network.
summary of the settlement agreement
Despite these efforts and the commitment to its original business
plan, the Company concluded that its obligations to its shareholders
and creditors required it to enter into the Agreement that is currently
before this Committee and Congress as a whole. The Settlement Agreement
contemplates, in sum, that the litigation and the regulatory disputes
between the FCC and NextWave will be fully and finally resolved. As a
result, NextWave's C Block and F Block licenses, which have been
subject to the cloud of litigation, and NextWave's D Block and E Block
licenses, which have been caught up in the delays caused by the dispute
with the FCC would be put immediately to productive use. The following
is a brief overview of the transactions and procedures encompassed in
the Settlement Agreement.
Even if the settlement agreement is approved by Congress, NextWave
will continue its efforts to create a wireless company, albeit on a
reduced scale. NextWave remains on schedule to launch commercial
service in the markets covered by its D Block and E Block licenses--
which were paid for in full and are not the subject of this
litigation--during 2002 and plans to continue operations with these
licenses even if the C and F Block licenses are referred to the
government.
(a) The Parties will seek legislation authorizing the FCC and
Department of Justice (the ``DOJ'') to settle with NextWave as set
forth in the Settlement Agreement.2 The proposed legislation
further appropriates the funds required to implement the settlement
between the FCC and NextWave and provides for an expedited appellate
review process for challenges to the Settlement Agreement or
transactions contemplated thereunder.
---------------------------------------------------------------------------
\2\ Capitalized terms utilized herein without definition are
intended to be defined as set forth in the Settlement Agreement.
---------------------------------------------------------------------------
(b) Pursuant to Sec. 363(b) and (f) of the Bankruptcy Code,
NextWave's C Block and F Block licenses will be returned to the FCC.
(c) Upon fulfillment of the conditions set forth in the Settlement
Agreement including (i) enactment of the Legislation; (ii) occurrence
of the Final Bankruptcy Settlement Approval Date; and (iii) transfer of
NextWave's C Block and F block licenses to the FCC, NextWave will
become entitled to receive $9.55 billion (the ``NextWave Payment'').
The NextWave Payment will be provided for in the legislation and owed
once the applicable conditions are satisfied. The NextWave Payment is
comprised of $3.052 billion as a nonrefundable advance tax payment (the
``Advance Tax Payment'') and $6.498 billion in cash (the ``Cash
Payment'').
(d) The FCC will retain $499 million of the deposits NextWave made
on its C and F Block licenses. In addition, NextWave is required to
make certain other payments to the FCC such that, when added to the
Advance Tax Payment and the retention of its deposits, NextWave will
have paid the United States $3.731 billion.
(e) It is contemplated under the Settlement Agreement that counting
the Advance Tax Payment and certain other payments by NextWave and the
payments by Auction 35 Participants for the C Block and F Block
licenses, the United States and the Commission will receive at least
$10 billion.
(f) Verizon and ANW are required to post letters of credit to
secure the payments they owe for their Auction 35 licenses. Conditioned
upon the posting of such letters of credit, once NextWave receives the
Cash Payment, it is required to pay Verizon and ANW $118.1 million and
$25 million respectively.
(g) If Verizon does not post a letter of credit in the amount of
$7,692,113,700 in January 2002, the FCC has the right to terminate the
Settlement Agreement. The NextWave Payment is also conditioned on the
issuance of an FCC Order approving the Settlement prior to January 10,
2002 and final resolution of any litigation relating to bankruptcy
approval of the Settlement.
(h) In accordance with its normal regulatory proceedings and
authority, the FCC will act upon the applications to issue the Auction
35 licenses to Participating Auction 35 Winning Bidders.
analysis of the settlement agreement \3\
---------------------------------------------------------------------------
\3\ See NextWave Personal Comm. Inc. v. Federal Comm. Comm'n, 254
F.3d 130 (D.C. 2001).
---------------------------------------------------------------------------
These benefits are particularly appealing to the Government and the
Auction 35 participants in light of the alternatives. As a result of
the D.C. Circuit proceeding, NextWave currently holds the C Block and F
Block licenses and the likelihood that the Supreme Court will act to
reverse the D.C. Circuit decision is small. Even in the unlikely event
of the grant of certiorari by the Supreme Court and a subsequent ruling
against NextWave, the litigation would not be ended. The proceedings
would then return to the D.C. Circuit for consideration and review of
NextWave's remaining claims, including due process and fair notice
claims. Even if the Government and the Auction 35 participants were
ultimately successful, the spectrum would be tied up until at least the
end of 2003, if not later.
This is a rare case in which the resolution, while not the outcome
any party would unilaterally select, is one that benefits all parties.
The FCC and the government will receive at least $10 billion, more than
twice the amount NextWave bid on the licenses at the original auction.
In contrast, as matters now stand, NextWave's obligation to the FCC in
the upcoming year will be to pay approximately $850 million, and its
total obligation to the FCC for the licenses will amount to only
approximately $5 billion. The settlement thus provides the United
States with $10 billion in 2002--ten times what it would otherwise
receive in that year from NextWave. The Auction 35 Participants will
receive the C Block and F Block licenses and will put them to immediate
use. This will enable these carriers, some of whom are currently or
might in the future suffer from spectrum capacity constraints, to
provide critical wireless services to consumers and may expedite the
provision of third generation wireless technology.
The settlement also benefits NextWave. While NextWave will be
foregoing the opportunity to fulfill the vision for which it has
struggled so long--that of becoming the first nationwide carriers'
carrier providing third generation services on a wholesale basis--its
creditors will receive payment in full and its shareholders will
realize a return on their equity investments. In addition, NextWave
will be able to complete the commercial launch of service in the
markets covered by the D Block and E Block licenses (primarily Detroit,
Michigan and Madison, Wisconsin). In addition, NextWave will be spared
the expense and delay that could result from further court and
regulatory litigation.
It is critical to realize, however, that these benefits come at a
substantial loss. Although the Company will be able to move forward and
build out a network in the five markets where it will continue to hold
licenses, the scale of its immediate future operations will be much
smaller than would have been possible had NextWave retained all the
licenses it currently holds. Moreover, the decision to settle has
imposed real and substantial lost opportunities for the Company.
Loss of past opportunity. In January 2000, NextWave proposed a plan
of reorganization that would have allowed it to emerge from bankruptcy
and would have paid the FCC in full for NextWave's license obligations.
The FCC, however, rejected NextWave's proposal and tried to cancel
NextWave's licenses. The D.C. Circuit ruled in June 2001 that the FCC's
actions were unlawful. Had the FCC's unlawful action not been prevented
from executing its plan in January 2000, NextWave would be a fully
operational wireless carrier by now, providing service across the
country. By way of comparison, another wireless carrier, VoiceStream,
which has a national footprint comparable to that of NextWave, was sold
for $29 billion after a little over two years of operation. That is an
opportunity that has already been taken from NextWave.
Loss of the present value of the spectrum. As a result of the D.C.
Circuit's ruling in June 2001, and its subsequent decision denying the
FCC a stay, the spectrum licenses that are the subject of this
settlement have been returned to NextWave, and NextWave is in full
possession of them and able to use them. The FCC's reauction of those
licenses established their market value at $15.85 billion. NextWave's
present obligation to the FCC for those licenses is approximately $5
billion payable over the next several years.
Loss of future opportunity. After the D.C. Circuit ruled in June
2001 that NextWave rightfully holds the licenses, the Company again
assembled a new plan of reorganization, and arranged for financing,
that would allow it to emerge from bankruptcy, build out its nationwide
wireless network, and become operational. Based on the value the market
has placed on the spectrum alone, it is likely that NextWave would
become a company of significant value in the very near future.
This Settlement Agreement is the result of arm's length bargaining.
The parties have been involved in an ongoing legal battle for years
with which the Committee is familiar. Over the past several years, the
parties have attempted on various occasions to discuss settlement
alternatives. The Settlement Agreement itself has taken months to
negotiate given the complexity of the issues involved. The negotiations
were arms length and have resulted in an Agreement where each party
benefits, but also has had to abandon achieving its particular view of
the appropriate outcome of litigation--the true description of a
compromise. We thus respectfully ask Congress to approve this
Settlement Agreement and enact the necessary implementing legislation.
Mr. Shimkus [presiding]. Thank you.
And the last panelist, Mr. Jim Winston, Corporate Secretary
of Urban Communications. You have 5 minutes, and your full
statement is in the record, and welcome.
STATEMENT OF JAMES L. WINSTON
Mr. Winston. Good afternoon. My statement says Chair
Upton----
Mr. Shimkus. I will take that as a compliment.
Mr. Winston. Members of the subcommittee, my name is James
Winston, Corporate Secretary and General Counsel of Urban
Communicators, P.C., a limited partnership, known as Urban
Comm.
Thank you for the invitation to appear before you today to
discuss the proposed settlement among NextWave Telecom, the
Federal Communications Commission, the Department of Justice,
and the Auction 35 participants.
I wish to make two points concerning this settlement.
First, it is indeed a fair and reasonable result for the
parties and the American public that the FCC would finally
recognize that they should move this process forward and settle
the NextWave litigation.
My second point is that it is also fair and reasonable that
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. 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 Urban Comm--okay. In 1996, Urban
Comm, like NextWave, obtained PCS licenses in the C-Block
auction.
Urban Comm obtained 10 licenses for an aggregate bid price
of $74.6 million, and paid a downpayment of $7.46 million for
those licenses. 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. When the
FCC announced that it would reauction Urban Comm's licenses,
Urban Comm filed a petition for reconsideration and a petition
to stay the reauction.
Those petitions were filed October 6, 2000, over 14 months
ago, and over 2 months before the reauction began. The FCC has
never acted on either petition. Last month, on November 9,
Urban Comm filed in the D.C. Court of Appeals a petition
seeking a writ of mandamus, which would order the FCC to act on
Urban Comm's petition for reconsideration.
A grant of the writ of mandamus will require the FCC to act
on our petition for reconsideration. If the FCC denies our
petition for reconsideration, Urban Comm will have the right to
appeal to the D.C. Court of Appeals.
At that point, Urban Comm will be in the same court which
issued the NextWave decision, and we will be arguing virtually
the same case. Thus, we expect a decision similar to the
NextWave decision at some time next year.
Like NextWave, Urban Comm believes that settlement of this
litigation is preferable to continued litigation. Throughout
the course of its Chapter 11 proceedings, Urban Comm has sought
to negotiate a settlement of this adversary proceeding with the
FCC.
However, every effort to negotiate a settlement with the
FCC has been rebuffed with the same netru. We can't settle with
you until we settle with NextWave. Therefore, Urban Comm is
here today to ask Congress to end the long tortured trail on
the C-Block and F-Block licensees.
The settlement of the NextWave litigation has been
presented to Congress as a reasonable and appropriate means of
resolving this ongoing saga. The C-Block and F-Block auctions
were a failed experiment by the FCC.
The FCC experiment was a number of auction ideas in that
subject auction that were subsequently abandoned, such as
setting itself up as the auction winners' senior creditor and
holding this position for a 10 year period.
The parties in the NextWave settlement have provided a
reasonable 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
public, and therefore, would be in the public interest.
Urban Comm's concern with the Federal 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 he Urban Comm case has essentially be
held in abeyance awaiting the resolution of the NextWave case.
Therefore, as a legal matter, the settlement of both cases
at this time is appropriate. Urban Comm's debt to the FCC of
approximately $75 million is only 1.6 percent 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 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, one, including language in the pending settlement
legislation directing the FCC and DOJ to immediately commence
settlement discussions with Urban Comm.
And, two, providing authority in this legislation to permit
a settlement similar to a 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 that you may have.
[The prepared statement of James L. Winston follows:]
Prepared Statement of James L. Winston, Secretary and General Counsel,
Urban Communicators PCS, L.P.
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. background
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.
ii. the fcc c-block and f-block auctions were a failed experiment
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.
iii. urban comm has been trying unsuccessfully for most of the past
three years to settle its chapter 11 related litigation with the fcc
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.
iv. the public interest will be served by adoption of legislation which
settles both the nextwave and urban comm proceedings
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.
Mr. Shimkus [presiding]. Thank you. And just for the
record, as you see, we have a small group of members left, but
we are pleased to see that the full committee chairman has been
diligent in listening, and is now prepared to open a first
round of questions, and he is recognized for 5 minutes.
Chairman Tauzin. Thank you, Mr. Chairman. Mr. Winston, let
me first thank you for your analysis in your testimony on page
two, in which you do a much better job than I tried to do in
outlining the failure of the C-Block auctions, and many of the
reasons why they failed.
And particularly I had not remembered this, the fact that A
and B-Block auctions occurred 1\1/2\ years prior to C-Block,
and therefore the largest cellular companies already had their
spectrum and were already deploying it by the time that smaller
companies, like yours and others, were invited to a C-Block
auction.
And the other point that you raised that the bidding
credits were essentially nullified in the process, which made
it even more difficult for smaller bidders to meet their
financial obligations in the bids.
All of that contributed as you pointed out to what should
have been a predictable failure of that process, correct?
Mr. Winston. Yes. Needless to say, we had high hopes in
1993 when Congress passed the Auction Authority Legislation,
and specifically provided in the legislation for opportunities
to be made available for small businesses, and businesses owned
by minorities and women.
From 1993 until the auction began in December 1995, we saw
one mistake after another that eviscerated everything Congress
tried to do with Section 309(j) of the Communications Act.
By giving the existing carriers a 1\1/2\ year headstart on
us, they had all the pluses going for them to begin with, and
then giving them a 1\1/2\ year headstart, I guess we should not
be too surprised at where we are now, but it is frustrating.
Chairman Tauzin. Well, the point is that the failure to get
the finances to deploy those licenses, and the fact that
bankruptcy followed was not terribly unpredictable when you
consider all the facts that led up to the NextWave and the
Urban Comm situation.
I mean, we are literally in this position largely because
of the failure of the early efforts at auctioning licenses, and
complicated as I pointed out by the fact that the budgeteers in
this body pushed an awful lot of spectrum out I think too soon,
and complicated the value of that spectrum in the marketplace.
Mr. Strigl, there is a little provision in the Fifth
Amendment of the Constitution. The Fifth Amendment is one that
politicians remember because they often have to take it before
courts.
But there is a provision at the end of it that I think is
often forgotten, and it reads as follows. ``That private
property shall not be taken for public purposes without just
compensation.''
Now, essentially, isn't that where we find ourselves? The
D.C. Circuit Court has said that whether we like the process or
not the government sold some property to NextWave, and that
whether you would like to buy it from the government again, the
court said that you can't do that because NextWave owns it and
the fact that they are in bankruptcy with their property does
not in any way take away their ownership of property rights.
Isn't that essentially what the D.C. Court said?
Mr. Strigl. Mr. Chairman, I think that is exactly what the
D.C. Court said.
Chairman Tauzin. And in effect you were invited to bid on
some government property that the government no longer owned.
It had not been paid for yet, but it no longer owned it; is
that right?
Mr. Strigl. Yes, sir. We did so with our eyes open.
Chairman Tauzin. And you knew that it was a risk coming in,
and so what we have is a situation where all these enormous
bids that were put up at this auction for property that the
government no longer owned are literally invalid if the D.C.
Court is correct, and if it were upheld, and if we went through
all kinds of litigation to the Supreme Court; is that correct?
Mr. Strigl. Yes, sir, that's correct.
Chairman Tauzin. So that while this is a nice pot of money
that the government would like to pick up, the government has
no right to literally if the D.C. Court is correct, has no
right to sell somebody else's property; and that you have
literally no legal rights to take that property in that sale
until the ownership was settled; is that correct?
Mr. Strigl. Mr. Chairman, we never took the property.
However, I might point out that we are still committed for the
$8.8 billion that we bid.
Chairman Tauzin. And in effect the settlement says that yo
guys are going to go ahead and all of you bid in this auction
for property that the government didn't own. And you are still
going to put up that money, and the government is going to get
not just the $4.86 billion that it was promised for in the C-
Block auction by NextWave, but it is going to get a substantial
amount more.
And NextWave is going to be paid something closer to the
current value of its property in the settlement. Is that
essentially what we are talking about?
Mr. Strigl. Yes, sir, I believe that is essentially what we
are talking about here, and I think it is very important that
we get certainty to this.
Chairman Tauzin. And if we don't, and we have said this a
number of times at this hearing, but if we don't accept this
settlement, whether we like the numbers in it, or we like the
position that we are in, or who was right or who was wrong in
this awful 5 year process, if we don't accept the settlement
and put it behind us, where are you?
I mean, you have bid for property that the government said
or the court said that you couldn't buy, and you put up a lot
of your resources to buy this property, and to I suspect forego
other business opportunities, and other things that you might
have done with this commitment of financial resources. Where
are you?
Mr. Strigl. First, I think, sir, that the settlement is
very fragile, and if December 31 comes and goes without the
enacting legislation, there is no certainty that this deal can
be put back together.
Speaking for my company, we have had what I would call a
dark cloud over our head since January, and that is the
commitment to pay the government $8.8 billion. There are plenty
of other things as one would imagine that a business can do
with $8.8 billion.
And we stand ready to explore some of those opportunities,
but not as long as this obligation hangs over our head.
Chairman Tauzin. And you chose instead to take a risk and
to put this money up to get this spectrum, and you must have
some awful big needs for that spectrum out there?
Mr. Strigl. We have great need for the spectrum, not only
to meet our capacity needs in major cities across the United
States, but also to roll out 3-G spectrum, and one of the
things that I have said to this subcommittee before is that I
believe that we are falling behind our foreign competitors.
Chairman Tauzin. I know that my time has expired, and I am
going to end, Mr. Chairman. We don't have a lot of members
here, but I want to end on this note, because Mr. Strigl has
made an excellent point here.
We are talking about spectrum that is apparently going to
be used for third generation wireless, and I don't know if
Americans fully understand the implications of third generation
wireless yet, or the fact that most European countries are
already way ahead of us in licensing out third generation
spectrum.
And companies in Europe and other parts of the world are
busy building the software and hardware that is going to manage
these systems, and provide incredible new services for people.
But we are talking about incredible new wireless devices
that are going to allow us to communicate much more readily and
reliably in not only good times, but in tough times, like
September 11 incidents.
And it will give us a chance to literally stay connected in
this country in a new highly dense sort of communications
wireless system called Third Generation. Without this spectrum
out there, and companies like yours investing in it, we are not
only behind Europe and other parts of the world, we are
desperately behind them; is that not correct?
Mr. Strigl. I think that is accurate, yes, sir.
Chairman Tauzin. Thank you, Mr. Chairman.
Mr. Shimkus [presiding]. Thank you, Mr. Chairman, and now I
will yield 5 minutes to the gentleman from Virginia, Mr.
Boucher.
Mr. Boucher. Well, thank you very much, Mr. Chairman. Mr.
Strigl, welcome. Let me pick up where Chairman Tauzin left off,
in terms of talking about the next generation of wireless
services and the extent to which you--and to the extent that
you know this--and other wireless companies may be planning to
devote this NextWave spectrum to the roll out of Third
Generation services.
Is that really your intent, or do you anticipate using part
of this spectrum for the enhancement of your existing
generation of voice-based services?
Mr. Strigl. Congressman Boucher, it is difficult to say
exactly any amount of spectrum that will be devoted to 3-G
services, as opposed to voice services. Our intention is to
meet our capacity demands, and at the same time roll out 3-G
spectrum over the--the 3-G services over the entirety of our
spectrum.
Here is what I know for certain. That without this spectrum
that we cannot devote any of the spectrum we have to anything
other than voice and short messaging service. Data,
particularly high speed data, is not a possibility in our major
cities with the limited spectrum that we have today.
Mr. Boucher. And so in the event that Congress does not
approve this settlement, and for various reasons the companies
that successfully bid for this spectrum in the reauction decide
to take their investment dollars elsewhere because of the
complexities that would lie ahead of them in the absence of
Congressional approval, you would see an effect then on the
ability of the United States to have the near-term deployment
of Third Generation services; is that correct?
Mr. Strigl. Yes, sir, and we are experiencing it now. I
think we would continue to experience it. This is essential for
carriers to have.
Mr. Boucher. And you would say that this spectrum is
essential for carriers to have to deploy Third Generation
services?
Mr. Strigl. Yes, sir.
Mr. Boucher. Let me ask you this also. When the Chairman of
the Federal Communications Commission was here a few moments
ago, we asked him about why it is necessary for Congress to
approve this settlement for it to become effective.
He mentioned two basic things. He said, first of all, that
there has to be an appropriation because the dollar flow simply
doesn't work if Congress doesn't have this appropriation made
and available at the time that all the other pieces are put in
place.
And potentially that could be handled by having an
appropriation approved without taking the other steps that
Congress is being asked to take in the settlement. So those
other steps I think are something that you perhaps
appropriately could address.
What else Congress is being asked to do is to provide an
expedited and specifically targeted process for handling any
challenges that are made of a legal nature to the settlement
itself.
And my question to you is why is that necessary? How
insistent are Verizon's lawyers that Congress has got to clear
this path, if you will, for this settlement to be something
that you can take confidence in.
And why would it be reasonable to think that parties who
are external to this settlement would actually have standing to
challenge it? We can assume that the parties to it are not
going to challenge it and so it has to be someone outside.
And so how could they have standing to do that? I realize
in-part that this is a legal question, but I am going to give
you an opportunity to convince us that we really have to do
this.
Mr. Strigl. Congressman, you have asked a multiple part
question, and let me attempt to answer at least some of these.
The fragile nature of this agreement, of putting the Auction 35
winners with the government, with NextWave, has been very
difficult for all parties concerned.
I think the issue from Verizon's point of view--and I
believe that Chairman Powell said it quite well--I have a board
of directors, and I have shareholders who are very concerned
about the opportunity costs of what my company has committed
to.
We have been under this cloud for some arguably 11 or 12
months, without any certainty, and the legislation brings
certainly, as Chairman Powell spoke of, from the point of view
of ending the litigation. From the point of view of putting the
spectrum into use.
And from my point of view of what I call putting clear
spectrum into use, and without any onerous legal challenges
that obviously are very troublesome to someone willing to make
an investment about the size of what we paid for the spectrum.
I think it is important to say here that we stand ready not
only to pay for the spectrum, but also to put investment in
place of approximately some $7 to $8 billion to use that
spectrum.
So in order to devote that $7 billion, plus another $8
billion, we have to know that we are through this onerous
litigation process. That is the driver, sir, why we are
insistent that we get some certainly to this once and for all.
Mr. Boucher. Thank you, Mr. Strigl. You make an excellent
case. Thank you, Mr. Chairman.
Mr. Shimkus. Thank you, and I will now recognize myself for
just one question. Mr. Cassou, many people have been able to
answer this for your company, and so I am going to give you an
opportunity to address this.
And as many people mentioned in their opening statements,
it is a $500,000 investment, and a $6.5 billion return--a
pretty good return--minus legal fees, and I know that legal
fees can be pretty high, but I don't think it would consume the
whole return.
How do we justify this then to our constituents as they are
trying to sort out whether we can justify and look at getting
spectrum available. There is a lot of things. But that is the
hurdle that a lot of us are going to have to overcome. Can you
kind of talk us through how we might be able to manage that?
Mr. Cassou. Yes. I tried to address that in my opening
statements that while the payment is a large payment, the
company, as a result of the D.C. Circuit decision this year,
has had the licenses reinstated to it, and those licenses have
through Auction 35 been valued at roughly $16 billion.
So as a result of this settlement, the company is agreeing
to forego the opportunity now to proceed forward with its plan
of reorganization and build out those licenses, and accepting
one-third of the value of the licenses, and the other two-
thirds, of course, going to the government and the taxpayers.
And NextWave throughout the process has complied with the
law. We made our initial downpayment as required by the FCC's
rules in a timely manner, and then after seeking protection
through bankruptcy in June 1998, also complied with the rules
as we operated under the bankruptcy laws as well.
So while it is not a result that we sought, we think it is
a fair settlement, and one that is beneficial to the taxpayers
and provides a fair return to the NextWave creditors and
investors that have been patient through this process.
Mr. Shimkus. Thank you. And, Mr. Winston, I would just make
a statement that your testimony is very compelling. It would
make the case for us of fair and equal treatment in
consideration of what you are attempting to do, and I think
that the committee will probably follow up on some of your
requests.
Mr. Winston. Thank you, sir.
Mr. Shimkus. With that, I would like to yield back my time
and recognize Mr. Markey for 5 minutes.
Mr. Markey. Thank you, Mr. Chairman, very much. Mr. Strigl,
first congratulations. Chairman Powell has lifted the spectrum
caps, and you really do have a bright future. Why wouldn't it
make sense for you to just walk away from this deal, take the
billions which you have invested in the auction, and just
purchase the additional spectrum which you need out in the open
marketplace, avoiding this entire mess? Doesn't that make
sense?
Mr. Strigl. Congressman, I have asked myself numerous times
over the last 11 months why we haven't, and why I haven't said
to my board, and to my shareholders, let's walk from this deal.
Mr. Markey. And the answer was?
Mr. Strigl. The answer is that I think I can get this
spectrum faster through the Auction 35 process, and that is
what I thought every month that has gone by, than to go out and
to try to acquire new spectrum.
Mr. Markey. But you didn't know that the spectrum cap was
going to be lifted at that point in time?
Mr. Strigl. Of course, Congressman, I didn't know that
until quite recently.
Mr. Markey. Right. But from this point on doesn't it make
sense for you to just go out and to purchase this additional
spectrum which you need?
Mr. Strigl. Congressman Markey, first of all, we have put a
lot of blood and sweat into this deal, and my feeling is that
the settlement that we have put together is fair and it is the
quickest way of putting spectrum to use.
If we were to do another deal, as you very well know, sir,
it would be months of a process to go through, and not only of
negotiating, but of license transfer approvals. I think that
this is the quickest way to use the spectrum.
Mr. Markey. Well, let me move to Mr. Cassou. Mr. Cassou, is
it?
Mr. Cassou. Yes.
Mr. Markey. Mr. Cassou, congratulations to you. You have
won the case, and you have great expectations that you would
win at the Supreme Court no doubt, and so the question that I
have for you is why don't you just build out the plan, or some
assemblance of the plan, which you as a company had always
intended to build out, instead of using this C-Block auction as
an exit strategy? Why don't you stay in the market? Why don't
you compete?
Mr. Cassou. Well, it actually isn't an exit strategy. We
have--as you know this has been a long and complex, and drawn
out litigation with the Commission. And throughout this process
we have been trying to vindicate our ability to build out the
licenses just as you say.
After the D.C. Circuit decision this summer, we filed a
plan of reorganization to do just exactly as you described, and
to proceed forward. We raised $5 billion toward that effort.
However, at the time that the Commission and the Auction 35
participants approached us at the end of August, we had a
fiduciary duty to our creditors and to our shareholders to look
at this and evaluate it, and to provide them with a path, and
to provide certainty, and also avoid further delays in the
investments that they have made in this process.
After balancing those considerations and talking with those
constituencies, it was the conclusion that it was time to stop
fighting with our regulator, and that this was a fair
settlement, and a good resolution of these issues.
Mr. Markey. Well, let me ask you this. The creditors or the
investors, they knew what the goal was, was to build out. And
now that you are on the cusp of victory, with a clear cut
Circuit Court decision, you could have gone to the Supreme
Court and got a knockout punch, and begun the process.
Why do you say that the fiduciary duty is to now just take
the money and exit the wireless business? Why is that a
fiduciary responsibility? Isn't there a longer term return on
investment that you would get that was always the promise that
you were giving to your investors?
Isn't this now the time to capitalize upon it as Mr. Strigl
and others are trying to gain more spectrum, and almost at any
cost? Isn't this the ideal time to build out your own plan and
to capture that over the next 20 and 30 years?
Mr. Cassou. Yes, we balanced those considerations against
the risks of further delay and litigation, even in the scenario
where we are successful with the Supreme Court, which we expect
that we would be.
There are as you have heard continuing regulatory petitions
that are on file with the Commission, and the carriers from the
industry have indicated in filings with the government back in
July that they would continue to pursue those regulatory
proceedings. So again we are looking to put an end to a
process.
Mr. Markey. Are you concerned that the FCC will never end
its proceedings surrounding your existence? Is that a concern
which you have? That Chairman Powell and the FCC will continue
to bring actions against you?
Mr. Cassou. They have been very fair to us in this current
settlement process and as I mentioned, we have additional
licenses that we will go forward and build out with, covering
roughly $6.5 billion POPs in five markets, and so the company
will be a licensee.
Mr. Markey. Well, I appreciate that, but what I am trying
to find is what is the source of your concern. Are you saying
that the FCC is just such a threat to you that you can't afford
not to basically sell out and never build out your dream of
having this network?
Mr. Cassou. Well, the history of our experience over the
past 5 years is that we have not been able to.
Mr. Markey. I appreciate that, but I am talking about the
FCC right now. Do you think they are an impediment to you
building out right now? If you went that course, legally you
know that you are on very strong ground.
Mr. Cassou. Yes, we have concerns though that we night be
further delayed through the regulatory proceedings and through
proceedings in which we have to justify extensions to the build
out requirements that are coming up.
Mr. Markey. I appreciate that, but you are long term
investors, and you are not in it just for the quick kill.
Mr. Cassou. That's correct, and we will be.
Mr. Markey. And so what I am saying is that over the next
20 or 30 years that you would definitely get a good return on
your investment over the long term.
Mr. Cassou. People like myself who have been with the
company for 6 years, and will continue to be with the company
to build out in the future, will continue that vision. The
creditors and investors that made their investments back in
1996 are looking for a solution that ultimately provides
certainty. If we had certainty to go forward and build out, we
would do that.
Mr. Markey. But you are so close with the Supreme Court
decision in the offering, and you could have just taken it
there. That's hard to understand why you would not have just
finished it off in other words.
Mr. Cassou. There was additional--certainly there is
additional risk at the Supreme Court level, although we believe
that we have the better arguments here, and then there is
further regulatory delays that we were expecting.
Mr. Markey. Mr. Winston, I wish I could say congratulations
to you.
Mr. Winston. I wish you could, too, sir.
Mr. Markey. How much would you settle for, Mr. Winston?
What would you accept?
Mr. Winston. Can you invite anybody else into a room
together and give up a number?
Mr. Markey. What do you think it is worth, Mr. Winston,
honestly?
Mr. Winston. We have not discussed numbers. Obviously we
have not had any settlement discussions with anyone to discuss
numbers about. But I would assume that a formula, similar to
the formula that was applied in the NextWave settlement, would
be a reasonable way of approaching a settlement with us.
Mr. Markey. Just one final question. Do you think that we
should end this process without resolving this issue of
bankruptcy law versus telecommunications law? Do you think that
should be a part of any legislative proposal that ultimately is
attached to any moving piece of legislation?
Mr. Winston. I think those issues are probably much larger
than the limited settlement that we are discussing here.
Mr. Markey. But because of the lack of resolution of that
larger issue, we have this settlement before us. Do you think
we should add predictability to that process henceforth as we
deal with this as the illuminating event that has drawn
everyone to the Commerce Committee here today?
Mr. Winston. I would hope that the committee would address
he settlement before with respect to NextWave, and hopefully
Urban Comm because of the issues that they have raised about
timing, et cetera.
And that the larger issue, I think, requires much more time
and attention than the specific matter before the committee
now.
Mr. Markey. Thank you, Mr. Winston, and Mr. Strigl, and Mr.
Cassou.
Mr. Shimkus. And thank you. Whitey Herzog may be coming to
the Sox, and so I may have to be routing for them. You know
that.
Mr. Markey. Are you rooting for the Red Sox?
Mr. Shimkus. Well, with Whitey Herzog, you could.
Mr. Markey. What is his nickname?
Mr. Shimkus. The Rat.
Mr. Markey. The Rat.
Mr. Shimkus. Fitting for Boston. I will now recognize Mr.
Engel for 5 minutes.
Mr. Engel. Well, I don't know about you guys, but I am
delighted that the Mets just got Roberto Alomar today. So, I
have to say. Mr. Strigl, the deadline of December 31 of this
year, some people have said that it is a power play by the
Department of Justice and the FCC, but I don't think it is.
I think it is a simple admission that the reauction bidders
are holding letters of credit for these projects and that by
tieing up so much capital for too long is obviously very
detrimental to Verizon. I would like you to expand on that.
Mr. Strigl. Yes. Congressman Engel, first of all, the
letters of credit will be posted as soon as this settlement is
finalized by legislation. But we do have what I would call a
very sizable $1.8 billion deposit that has been sitting with
the government and not collecting interest for many months.
And our fear is that that would stay in place without
interest going forward without this settlement. We think that
on December 31 that it may very well be in our best interests
to walk from this deal, and to use the $8.8 billion for other
opportunities.
There are plenty of opportunities in the marketplace today,
and we think that those are worth investigating. However, at
the same time, if we can conclude this and bring certainty to
this process, that is certainly in our best interests.
Mr. Engel. Well, I would think it would be in everybody's
best interests. I think that is in line with the question that
Mr. Markey was asking as well. I think there is a limit to how
long this can drag on.
Mr. Strigl. Yes, sir.
Mr. Engel. How long after Verizon takes control of these
licenses will your company begin using them and deploying
telecommunications equipment that utilizes this spectrum?
Mr. Strigl. Immediately. Our intention is the end of June,
July 1, to take possession of this spectrum, and to begin
building out certainly in the year 2002 as rapidly as we can,
particularly in our major cities.
Mr. Engel. So again that would be an incentive to wrap this
up as quickly as possible, or at least from my vantage point it
seems very simple to me.
Mr. Strigl. We can put it to use, sir, in places like New
York, Chicago, Washington, DC, Boston, and other major cities
almost immediately.
Mr. Engel. Okay. Thank you very much. Thank you, Mr.
Chairman.
Mr. Shimkus. Thank you. Mr. Markey, do you have anything to
add? Seeing no other members, I will call this hearing
adjourned.
[Whereupon, at 5:47 p.m., the subcommittee was adjourned.]