[Federal Register Volume 62, Number 180 (Wednesday, September 17, 1997)]
[Rules and Regulations]
[Pages 48787-48797]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-24789]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 101

[CC Docket No. 92-297; FCC 97-323]


The Local Multipoint Distribution Service (``LMDS'')

AGENCY: Federal Communications Commission.

ACTION: Final rule; order on reconsideration

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SUMMARY: On September 9, 1997, the Federal Communications Commission 
adopted a Second Order on Reconsideration amending certain rules 
pertaining to Local Multipoint Distribution Service (``LMDS'') 
operations in the 27.5-28.35 GHz, 29.1-29.25 GHz, and 31.0-31.3 GHz 
bands. These amendments are being made in response to certain petitions 
for reconsideration of the Second Report and Order in this proceeding 
which established rules and policies for LMDS. The effect of this 
action is to make amendments to the rules regarding favorable small 
business provisions available to qualifying applicants for LMDS 
licenses.

EFFECTIVE DATE: November 17, 1997.

FOR FURTHER INFORMATION CONTACT: Matthew Moses, Wireless 
Telecommunications Bureau, (202) 418-0660.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Second 
Order on Reconsideration in CC Docket No. 92-297, FCC 97-323. The 
complete Second Order on Reconsideration is available for inspection 
and copying during normal business hours in the FCC Reference Center 
(Room 239), 1919 M Street, N.W., Washington, D.C., and also may be 
purchased from the Commission's copy contractor, International 
Transcription Service, Inc., (202) 857-3800, 1231 20th Street, N.W., 
Washington, D.C. 20036. The complete Second Order on Reconsideration is 
also available on the Commission's Internet home page (http://
www.fcc.gov).

SUMMARY of THE SECOND ORDER on RECONSIDERATION

    1. The Commission has before it several petitions for 
reconsideration of the Second Report and Order, Order on 
Reconsideration, and Fifth Notice of Proposed Rulemaking in this 
proceeding. Rulemaking To Amend Parts 1, 2, 21, and 25 of the 
Commission's Rules To Redesignate the 27.5-29.5 GHz Frequency Band, To 
Reallocate the 29.5-30.0 GHz Frequency Band, To Establish Rules and 
Policies for Local Multipoint Distribution Service and for Fixed 
Satellite Services, Petitions for Reconsideration of the Denial of 
Applications for Waiver of the Commission's Common Carrier Point-to-
Point Microwave Radio Service Rules, CC Docket No. 92-297, Suite 12 
Group Petition for Pioneer Preference, PP-22, Second Report and Order, 
Order on Reconsideration, 62 FR 23148 (April 29, 1997), and Fifth 
Notice of Proposed Rulemaking, 62 FR 16514 (April 7, 1997) (``LMDS 
Second Report and Order'') (``Fifth Notice of Proposed Rulemaking'') 
(``Order on Reconsideration''), adopting subpart L of part 101 of the 
Commission's rules, 47 CFR 101.1001-1112; appeal pending sub nom. 
Melcher v. FCC, Case Nos. 93-1110, et al. (D.C. Cir., filed February 8, 
1993) (eligibility restrictions); Errata (released April 7 and May 1, 
1997); Order on Reconsideration, 62 FR 28373 (May 23, 1997). The 
Commission defers the comments and all matters raised for comment in 
the Fifth Notice of Proposed Rulemaking to a separate Report and Order 
to be issued in the near future. CellularVision USA, Inc. 
(``CellularVision''), WebCel Communications, Inc. (``WebCel''), Cook 
Inlet Region, Inc. (``Cook Inlet''), LBC Communications, Inc. 
(``LBC''), the Rural Telecommunications Group (``RTG''), the 
Independent Alliance, and Sierra Digital Communications, Inc. filed 
petitions for reconsideration of the LMDS Second Report and Order. LDH 
International, Inc., Celltel Communications Corporation, and CT 
Communications Corporation jointly filed a petition for reconsideration 
of the Order on Reconsideration, and M3 Illinois Telecommunications 
Corporation filed a petition for review of the Order on 
Reconsideration. This Second Order on Reconsideration addresses those 
portions of the petitions of CellularVision, WebCel, and Cook Inlet 
that deal with the participation of small businesses in the upcoming 
auction of LMDS licenses.
    2. In authorizing the Commission to use competitive bidding, 
Congress mandated that the Commission ``ensure that small businesses, 
rural telephone

[[Page 48788]]

companies, and businesses owned by members of minority groups and women 
are given the opportunity to participate in the provision of spectrum-
based services.'' Section 309(j)(4)(D) of the Communications Act of 
1934, as amended (``Communications Act''), 47 U.S.C. 309(j)(4)(D). 
These categories are collectively known as ``designated entities.'' 
Noting the lack of a record to support special provisions for 
businesses owned by members of minority groups and women, the 
Commission adopted provisions for small businesses in the belief that 
they would also assist minority-and women-owned entities, many of which 
are small businesses. For the reasons set forth below, the Commission 
reconsiders and modifies certain rules affecting small business 
participation in the LMDS license auction. Specifically, the 
Commission:
     Eliminates installment payments for LMDS licensees in 
favor of revised, tiered bidding credits for very small, small, and 
entrepreneurial businesses participating in this auction;
     Denies a request to adopt an ``asset test'' for evaluating 
business size; and
     Declines to further address the qualifications of 
licensees that are delinquent or in default on FCC licenses in other 
services for obtaining favorable provisions for this auction.
Those portions of the aforementioned petitions that do not deal with 
the small business participation rules will be addressed in a separate 
Commission ruling.
    3. In the LMDS Second Report and Order, the Commission adopted 
service and competitive bidding rules for LMDS which included, inter 
alia, provisions designed to assist two distinct sizes of small 
businesses and entities. Entities with average gross revenues for the 
preceding three years of more than $40 million but not more than $75 
million hereinafter are referred to as ``entrepreneurs.'' The 
Commission notes that this is the first time in the LMDS proceeding in 
which the term ``entrepreneurs'' has been used to refer to entities 
with average gross revenues for the preceding three years of more than 
$40 million but not more than $75 million. A small business is defined 
as ``an entity that, together with its affiliates and controlling 
principals, has average gross revenues for the three preceding years of 
not more than $40 million.'' For entrepreneurs, the Commission made 
available 15 percent bidding credits and installment payments at the 
same interest rate as for small businesses. Installment payments for 
entrepreneurs consist of both interest and principal amortized over the 
ten years of the license term. Small businesses are eligible for 25 
percent bidding credits and installment payments, the interest rate for 
which is based on the rate for ten-year U.S. Treasury obligations, 
fixed at the time of licensing, plus 2.5 percent. Installment payments 
for small businesses consist of interest-only payments for the first 
two years, and interest and principal amortized over the remaining 
eight years of the license term.
    4. CellularVision, WebCel, and Cook Inlet request that the 
Commission reconsider certain aspects of the small business provisions 
established in the LMDS Second Report and Order. These petitioners also 
variously seek reconsideration of other aspects of the LMDS rules, but 
this proceeding addresses only their designated entity proposals. Zip 
Communications Corporation (``Zip''), RTG, and CellularVision filed 
oppositions to various portions of these petitions. Bell Atlantic 
Corporation also opposes the WebCel Petition, which it characterizes as 
an ``effort to suppress bidding competition,'' but does not 
specifically address WebCel's arguments regarding designated entity 
provisions. WebCel and CellularVision also replied to some of the 
oppositions. Finally, the Commission received ex parte communications 
from the National Venture Capital Association (``NVCA''), U.S. WaveLink 
Telecommunications Group, L.P. (``U.S. WaveLink''), WebCel, 
CellularVision, and LBC. Petitions for judicial stay of the LMDS Second 
Report and Order have also been filed. Those cases have since been 
consolidated in the U.S. Court of Appeals for the District of Columbia 
in Melcher v. FCC.

I. Commencement of the Auction

    5. Petitions. U.S. WaveLink urges the Commission to announce that 
the LMDS auction will begin no later than November, 1997, believing 
expedition imperative to ensure sound business planning. U.S. WaveLink 
asserts that the LMDS auction is already long overdue, that capital 
markets have been poised to invest, and that further delay will dampen 
investors' interest, slow the delivery of innovative video programming 
and telecommunications services to the public, and irreparably harm 
competition in LMDS and in the video programming and telecommunications 
markets in which LMDS licensees seek to compete. U.S. WaveLink notes 
that it has already been several months since the Commission last 
directed the Wireless Telecommunications Bureau to implement procedures 
for auctioning LMDS licenses pursuant to the LMDS Second Report and 
Order, and that it has been more than four years since the Commission 
first proposed to authorize LMDS operation and almost a year since the 
Commission designated spectrum for LMDS use. Zip also urges the 
Commission to commence the LMDS auction as expeditiously as possible.
    6. Discussion. The Commission agrees with U.S. WaveLink and Zip 
regarding the need to move expeditiously to auction the LMDS licenses. 
The Commission believes that the public will significantly benefit from 
the availability of new services via LMDS and from the benefits of 
competition between LMDS and established services. The Commission is 
concerned that further delay may slow the delivery of new services to 
the public and harm the growth of competition. The Commission also 
wants to give sufficient time from the date of the release of this 
Second Order on Reconsideration for potential bidders to arrange 
financing. Therefore, the Commission has recently announced that the 
LMDS auction will begin on December 10, 1997. This issue is therefore 
moot.

II. Installment Payments

    7. Petitions. Cook Inlet urges us to eliminate the installment 
payment plans for LMDS licensees. Cook Inlet asserts that installment 
payment plans fueled speculation in the broadband Personal 
Communications Services (``PCS'') auctions, encouraged expectations of 
Commission relief from payment obligations, and saddled the Commission 
with difficult credit-related tasks for which it has no experience. 
Cook Inlet Petition also notes the Commission's statement in the 
current proceeding to modify its general competitive bidding rules:

    We note that substituting a system of larger bidding credits 
might eliminate the administrative and market concerns associated 
with installment payments, while nonetheless ensuring opportunities 
for small businesses to participate in auctions.

Amendment of Part 1 of the Commission's Rules--Competitive Bidding 
Proceeding, WT Docket No. 97-82, Order, Memorandum Opinion and Order, 
and Notice of Proposed Rule Making, 62 FR 13540 (March 21, 1997), at 
para. 34 (``Part 1 Order and NPRM''). Cook Inlet further argues that 
installment payment programs force the Commission to balance its duty 
to regulate the provision of wireless services with its sometimes 
conflicting obligation to manage the federal debt responsibly. To 
ensure that small businesses have the opportunity to compete for LMDS 
licenses, Cook Inlet urges the Commission to offer increased

[[Page 48789]]

bidding credits in place of installment payment plans, which it asserts 
will allow responsible small bidders with appropriately tailored 
business plans to secure private financing, without sacrificing market 
driven bidding discipline.
    8. CellularVision, WebCel, Zip and LBC oppose Cook Inlet's proposal 
to eliminate installment payment plans for LMDS licensees. 
CellularVision and WebCel argue that section 309(j)(4) of the 
Communications Act requires the Commission to consider the use of 
installment payments as a means of ensuring that licenses are held by a 
wide variety of applicants, including small businesses. WebCel further 
argues that installment payments were successful in past auctions, and 
that in this proceeding the Commission lacks the requisite degree of 
justification to eliminate them, citing 47 U.S.C. 309(j)(4)(A) and (D), 
the Administrative Procedures Act, generally, and Motor Vehicle 
Manufacturers Ass'n v. State Farm Mutual Ins. Co., 463 U.S. 29 (1983) 
(``Motor Vehicle Manufacturers''). CellularVision, WebCel and LBC also 
express doubts that private financing will be available or sufficient 
for participation in the LMDS auction and subsequent build-out, 
marketing and operations. Zip agrees with Cook Inlet that its proposal 
would curb speculative bidding, but also believes that it would 
eliminate any meaningful opportunity for small businesses to 
participate in the LMDS auction. If the Commission does eliminate 
installment payments for LMDS licensees, CellularVision proposes that 
small businesses, as currently defined, receive a 50 percent bidding 
credit in order to attract the necessary private financing to compete 
in the LMDS auction.
    9. Contrary to Cook Inlet's proposal, CellularVision asserts that 
an additional, ``deferred incremental repayment'' installment payment 
option, that takes into account the special resource-intensive 
characteristics of LMDS, is necessary to ensure maximum small business 
participation in the LMDS auction. Under CellularVision's proposal, 
payments of interest, at a rate equal to a 10-year U.S. Treasury note, 
would commence in year six, while payments of principal would commence 
in year seven under an incremental structure of five percent in year 
seven, 10 percent in years eight and nine, and the remaining 75 percent 
in the final year. WebCel, for its part, suggests the creation of two 
additional ``very small'' business categories which would include 
proportionally favorable installment payment plans. Zip opposes 
CellularVision's proposal, asserting that the elimination of any 
immediate financial obligation would give bidders an incentive to 
engage in speculation, and that it may encourage bidders to drive 
prices beyond the range of small businesses, with the expectation that 
the Commission will forgive the winners' debt obligations if they later 
find that they have overreached. CellularVision asserts in reply that 
the auction process itself virtually eliminates the possibility of 
speculation.
    10. Discussion. The Commission grants Cook Inlet's petition and 
eliminates installment payment plans for LMDS licensees. 
Notwithstanding the arguments of CellularVision and WebCel, Congress 
did not require the use of installment payments in all auctions, but 
rather recognized them as one means of promoting the objectives of 
section 309(j)(3) of the Communications Act. Section 309(j)(4) of the 
Communications Act states that the Commission shall, in prescribing 
regulations pursuant to these objectives and others, ``consider 
alternative payment schedules and methods of calculation, including 
lump sums or guaranteed installment payments, with or without royalty 
payments, or other schedules or methods that promote the objectives 
described in paragraph (3)(B) * * * .'' 47 U.S.C. 309(j)(4)(A) 
(emphasis added). The legislative history of section 309(j) of the 
Communications Act indicates that:

    While it is clear that, in many instances, the objectives of 
section 309(j) will be best served by a traditional, ``cash-on-the-
barrelhead'' auction, it is important that the Commission employ 
different methodologies as appropriate. Under this subsection, the 
Commission has the flexibility to utilize any combination of 
techniques that would serve the public interest.

Omnibus Budget Reconciliation Act of 1993, Report of the Committee on 
the Budget, House of Representatives, to Accompany H.R. 2264, A Bill to 
Provide for Reconciliation Pursuant to section 7 of the Concurrent 
Resolution of the Budget for Fiscal Year 1994, May 25, 1993, at p. 255. 
The Commission continues to experiment with different means for 
achieving its obligations under the statute, and has offered 
installment payments to licensees in several auctioned wireless 
services. By no means, however, has Congress dictated that installment 
payments are the only tool in assisting small business. Indeed, the 
Commission has conducted several auctions without installment payments. 
Moreover, in recent legislation, Congress dictated that certain future 
auctions effectively be conducted without installment payments. Section 
3001 of the Omnibus Consolidated Appropriations Act for 1997, Public 
Law 104-208, 110 Stat. 3009 (1996) (``Omnibus Consolidated 
Appropriations Act'') is one example. Another example is the Balanced 
Budget Act of 1997, Public Law 105-33, 111 Stat. 251 (1997). Section 
3007 of the Balanced Budget Act of 1997, which significantly amends 
section 309(j) of the Communications Act, requires that:

    The Commission shall conduct the competitive bidding required 
under this title or the amendments made by this title in a manner 
that ensures that all proceeds of such bidding are deposited in 
accordance with section 309(j)(8) of the Communications Act of 1934 
not later than September 30, 2002.

The Conference Report on the Balanced Budget Act of 1997 indicates that 
the deadline set forth in section 3007 ``applies to all competitive 
bidding provisions in this title of the conference agreement and any 
amendments to other law made in this title.'' Conference Report on H.R. 
2015, Balanced Budget Act of 1997, Congressional Record--House, Vol. 
143, No. 109--Part II, at H6176. The Commission has carefully 
considered the use of installment payment plans for LMDS licensees. The 
Commission concludes that it can meet its statutory obligations absent 
these provisions.
    11. The Commission must balance competing objectives in section 
309(j) that require that it promote the development and rapid 
deployment of new spectrum-based services and ensure that designated 
entities are given the opportunity to participate in the provision of 
such services. In assessing the public interest, the Commission must 
try to ensure that all the objectives of section 309(j) are considered. 
While the Commission disagrees with Cook Inlet's contention that 
installment payments necessarily encourage speculation, the 
Commission's experience with the installment payment program leads it 
to conclude that installment payments may not always serve the public 
interest. The Commission has found, for example, that obligating 
licensees to pay for their licenses as a condition of receipt requires 
greater financial accountability from applicants. Amendment of Part 90 
of the Commission's Rules to Facilitate Future Development of SMR 
Systems in the 800 MHz Frequency Band, PR Docket No. 93-144, RM-8117, 
RM-8030, RM-8029, Implementation of Section 3(n) and 322 of the 
Communications Act--Regulatory Treatment of Mobile Services, GN Docket 
No. 93-252, Implementation of

[[Page 48790]]

Section 309(j) of the Communications Act--Competitive Bidding, PP 
Docket No. 93-253, Memorandum Opinion and Order, 62 FR 41225 (July 31, 
1997) (``800 MHz MO&O'') at para. 130. The Commission is presently 
examining issues relating to its administration of installment 
payments, including those raised by Cook Inlet, in several other 
proceedings. Because of the importance of these issues, the Commission 
plans to incorporate its decisions regarding installment payments for 
the broadband PCS C and F Blocks and other financial issues into its 
part 1 rulemaking. Nevertheless, the Commission agrees with U.S. 
WaveLink and Zip about the need to move expeditiously to auction the 
LMDS licenses. The Commission believes that the public interest is best 
served by going forward with the LMDS auction without extending 
installment payments to LMDS licensees. In place of installment 
payments, the Commission establishes other changes that will provide 
for the interests of new entrants.
    12. The Commission disagrees with the contentions of WebCel, LBC, 
and Zip that installment payments are necessary to ensure a meaningful 
opportunity for small businesses to participate in LMDS. In other 
auctions in which installment payments were not available, small 
businesses were the high bidders on a significant number of licenses. 
In the Wireless Communications Service (``WCS'') auction, which had 
bidding credits of 25 percent for small businesses and 35 percent for 
very small businesses and no installment payments, 25 percent of the 
licenses went to small or very small businesses. In the cellular 
auction of licenses for unserved areas, which had no special bidding 
provisions, 36 percent of the licenses went to small or very small 
businesses. CellularVision, although expressing some doubts regarding 
the ability of small businesses to attract private financing, suggests 
that a large enough bidding credit would enable small businesses to do 
so, while Cook Inlet contends that increased bidding credits will allow 
responsible small bidders with appropriately tailored business plans to 
secure private financing. WebCel, Cook Inlet, and NVCA also point out, 
as discussed below, that LMDS may be built out incrementally, which may 
allow for lower levels of front-end system financing than other 
services. Further, as the Commission has already noted, section 309(j) 
requires it to consider alternative methods to allow for dissemination 
of licenses among designated entities, including small businesses. The 
Commission believes that the methods discussed below will both fulfill 
the mandate of section 309(j) to provide small business with the 
opportunity to participate in auctions and ensure that new services are 
offered to the public without delay.
    13. Since the Commission has decided not to offer installment 
payments, it rejects as moot both CellularVision's proposed deferred 
incremental repayment and WebCel's suggestion of a favorable interest 
rate for very small businesses. The Commission further disagrees with 
WebCel that it lacks adequate justification to eliminate installment 
payment plans for LMDS licensees under the Administrative Procedures 
Act and Motor Vehicle Manufacturers. Section 706(2)(A) of the 
Administrative Procedures Act states that agency actions, findings, and 
conclusions shall be held unlawful and set aside if they are found to 
be ``arbitrary, capricious, an abuse of discretion, or otherwise not in 
accordance with law * * *.'' Motor Vehicle Manufacturers held that this 
standard is applicable to rescission or modification of rules. Under 
Motor Vehicle Manufacturers and other cases, an agency acts arbitrarily 
or capriciously if it fails to examine the relevant data and articulate 
a satisfactory explanation for its action including a ``rational 
connection between the facts found and the choices made.'' Motor 
Vehicle Manufacturers, 463 U.S. at 43, citing Burlington Truck Lines v. 
United States, 371 U.S. 156 (1962). Motor Vehicle Manufacturers also 
acknowledged that `` `regulatory agencies do not establish rules of 
conduct to last forever,' * * * and that an agency must be given ample 
latitude to `adapt their rules and policies to the demands of changing 
circumstances.' '' Motor Vehicle Manufacturers, 463 U.S. at 42 
(citations omitted). The Commission has fully considered the issue 
based on its experience with installment payment plans and the record 
before it in this proceeding.

III. Very Small Business Category

    14. Petitions. In place of the current installment payment plan, 
Cook Inlet requests the institution of a ``very small business'' 
category, featuring a 35 percent bidding credit, for entities that, 
together with affiliates and controlling principals, have average gross 
revenues for the preceding three years of not more than $15 million. 
Cook Inlet opines that while substantial capital will be necessary to 
acquire and construct LMDS systems, LMDS may provide better 
opportunities for smaller entities than did broadband PCS because LMDS 
operators will be able to build out systems incrementally without 
compromising their provision of service to end users. Cook Inlet notes 
the examples of wireless local loop or video offerings, in which it 
asserts that ``a smaller system may stand on its own on a more 
localized basis without the need for immediate `total area' coverage or 
even national systems support.''
    15. NVCA and WebCel also advocate very small business categories, 
although not in place of installment payments, arguing that the fixed 
nature of LMDS service allows cell sites and network infrastructure to 
be deployed incrementally to match revenue generation. Therefore, the 
initial capital-raising requirements for one or a few markets are not 
as formidable as services that require extensive buildout before they 
are put into service. NVCA also asserts that because the fixed nature 
of LMDS obviates the need for nationwide roaming and national branding, 
very small businesses can be successful with only one or a few 
licenses. NVCA characterizes LMDS as potentially ``one of the best new 
venture opportunities for locally-owned small businesses and 
entrepreneurial start-ups to enter the telecommunications industry.'' 
Both NVCA and WebCel express concern that without a very small business 
category, entrepreneurial entities with differentiated business plans 
and adequate venture financing, who would otherwise succeed in building 
local LMDS businesses, will be outbid by much larger entities that 
currently qualify for the same provisions. WebCel consequently requests 
the adoption of a very small business category for entities with 
average gross revenues for the three preceding years of not more than 
$15 million, and an additional very small business category for 
entities with average gross revenues for the three preceding years of 
not more than $3 million, and seeks advantageous installment payment 
rates and bidding credits for these categories. RTG concurs with 
parties advocating inclusion of a very small business category in the 
LMDS auction, asserting that LMDS is capital-intensive and that small 
businesses will not be able to afford licenses or effectively deploy 
their systems without additional incentives.
    16. CellularVision opposes implementation of WebCel's plan if it 
would reduce current incentives for small businesses or entrepreneurs, 
believing that any incentives granted for very small businesses must be 
in addition to the current bidding credits and installment payment 
plans for those entities. Zip also opposes WebCel's

[[Page 48791]]

proposal for a very small business category, without elaboration.
    17. Discussion. The Commission will create an additional category 
to benefit ``very small'' businesses bidding for LMDS licenses, along 
the lines suggested by Cook Inlet, NVCA, WebCel, and RTG. The 
Commission agrees that a unique category for very small businesses will 
serve as an effective method of leveling the competitive imbalance 
between very small businesses and other entrepreneurial entities. The 
Commission will define ``very small'' businesses as entities that, 
together with controlling principals and affiliates, have average gross 
revenues for the three preceding years of not more than $15 million. 
The Commission will also re-define ``small'' businesses as entities 
that, together with controlling principals and affiliates, have average 
gross revenues for the three preceding years of more than $15 million 
but not more than $40 million. These categories are identical to those 
adopted for the broadband PCS F Block auction, as petitioners argue. 
The Commission will apply to the very small business category the same 
attribution, control, consortia, upfront payment, and unjust enrichment 
rules that it adopted for its small business and entrepreneur 
categories.
    18. The Commission declines to adopt WebCel's suggestion of another 
category for entities that, together with controlling principals and 
affiliates, have average gross revenues for the three preceding years 
of not more than $3 million. Under the revised ``tiered'' approach, the 
Commission will have three categories of bidders: ``entrepreneurs,'' 
``small businesses,'' and ``very small businesses.'' Creating an 
additional category (i.e., ``very, very small'' businesses) adds 
another layer of complexity with little countervailing benefit to 
bidders. The Commission believes that the three categories will 
adequately serve to diversify opportunity in its LMDS auction.

IV. Bidding Credits

    19. Petitions. As previously described, Cook Inlet supports 
heightened bidding credits in lieu of installment payment plans for 
LMDS licenses. Specifically, Cook Inlet suggests the establishment of 
the aforementioned very small business category with a 35 percent 
bidding credit, and the retention of a 25 percent bidding credit for 
small businesses and a 15 percent bidding credit for entrepreneurs. 
Cook Inlet asserts that ``increased bidding credits such as these'' are 
appropriate in the absence of installment payment plans. To the extent 
that installment payments are no longer available for LMDS licensees, 
CellularVision proposes a 50 percent bidding credit for small 
businesses, as currently defined, in order to attract the necessary 
private financing to compete in the LMDS auction. WebCel requests that 
the Commission offer either a bidding credit of 35 percent for its two 
very small business categories, or adopt the tiered scheme employed for 
the broadband PCS F Block auction--a 25 percent bidding credit for very 
small businesses, a 15 percent bidding credit for small businesses, and 
no bidding credit for entrepreneurs.
    20. Discussion. The Commission will offer higher bidding credits 
than those adopted in the LMDS Second Report and Order for small 
businesses and entrepreneurs. The Commission agrees with Cook Inlet and 
CellularVision that heightened bidding credits are appropriate in the 
absence of installment payment plans. Also, contrary to WebCel's 
assertions, the Commission believes that heightened bidding credits 
will fulfill the mandate of section 309(j)(4)(D) of the Communications 
Act to provide small businesses with the opportunity to participate in 
spectrum-based services. As noted above, this approach was successful 
in enabling small businesses to participate in the WCS auction, in 
which the Commission was unable to employ installment payments because 
of the statutory deadline for depositing auction revenues in the U.S. 
Treasury. The Commission also recently used this approach in 
establishing rules for the auction of licenses for 800 MHz Specialized 
Mobile Radio (``SMR''). However, the Commission does not agree with the 
bidding credit levels suggested by the petitioners. Except for entities 
that would qualify as very small businesses, Cook Inlet's proposed 
levels would not account for the loss of installment payment plans. 
WebCel's alternative suggestion of conforming the LMDS bidding credit 
levels to those employed in the broadband PCS F Block auction would 
entail reducing the bidding credits available to small businesses and 
entrepreneurs at the same time that the Commission is eliminating 
installment payments. CellularVision has not provided any support for 
its assertion that small businesses will require a 50 percent bidding 
credit to attract private financing.
    21. The Commission will raise the bidding credit available to small 
businesses (entities with average gross revenues for the three 
preceding years of more than $15 million but not more than $40 million) 
to 35 percent and the bidding credit available to entrepreneurs 
(entities with average gross revenues for the preceding three years of 
more than $40 million but not more than $75 million) to 25 percent. 
These levels reflect the thresholds adopted in the LMDS Second Report 
and Order, with a reasonable adjustment of ten percent for the 
unavailability of installment payment plans for LMDS licensees. In 
addition, the Commission will adopt a 45 percent bidding credit for 
very small businesses (entities with average gross revenues for the 
three preceding years of not more than $15 million) in the LMDS 
auction. This level reflects the 35 percent threshold requested by 
WebCel, plus a reasonable adjustment for the lack of bidding credits. 
The Commission notes that it is difficult to accurately calculate the 
net present value of an installment payment plan (which value would 
depend on several variables, including future commercial interest 
rates), and the Commission does not in any event commit to an exact 
accommodation or reimbursement of the value of installment payments. 
Nor does the Commission intend to exactly match its small business 
provisions for LMDS to those employed in other services such as WCS or 
800 MHz SMR. The Commission's small business provisions for LMDS have 
historically deviated from those adopted for other services, and the 
Commission believes that an effort to conform them to the provisions 
adopted for other types of wireless services would be pointless.

V. Asset Test

    22. Petitions. WebCel, Zip, and NVCA suggest the institution of an 
asset test in the Commission's small business size standards to 
differentiate start-ups from larger entities. WebCel's suggested asset 
test would consist of a ``financial eligibility threshold'' excluding 
firms with total assets in excess of $500 million, the measure of which 
would include the value of other licenses held. Zip suggests financial 
eligibility thresholds of $250 million for small businesses, and $500 
million for entrepreneurs. Zip theorizes that the lack of discussion in 
the LMDS Second Report and Order of the Commission's decision not to 
adopt an asset threshold test, as well as the requirement in 
Sec. 101.1109(c) of the Commission's rules that winning bidders' 
records include asset information, indicates that the absence of an 
asset test may have been an oversight. NVCA would have us apply the 
$500 million threshold employed in other auctions.
    23. Discussion. The Commission will not adopt an asset test for the 
LMDS

[[Page 48792]]

auction. Although the Commission has adopted an asset test for 
eligibility for particular blocks of licenses in broadband PCS 
auctions, the Commission has never before employed an asset test for 
eligibility for small business size standards. The Commission also 
notes that the Small Business Administration, the rules of which have 
formed the basis for much of its own consideration of small business 
provisions, presently does not employ asset tests in its business size 
standards except in the context of banks. Assets, being potentially 
fluid and subject to inconsistent valuation (e.g., intangibles) are 
generally much less ascertainable than gross revenues or numbers of 
employees. The Commission further notes that it has never counted 
licenses won in other auctions as assets for purposes of calculating 
total assets, as requested by WebCel, and there would appear to be 
significant questions of proper valuation (e.g., amortization 
schedules) in doing so. Given the complexity and significance of the 
issues associated with asset tests and the importance of proceeding 
with the LMDS auction without further delay, the Commission do not feel 
that it has enough data at this time to do adopt an asset test for 
LMDS. However, the Commission will consider adopting an asset test in 
future auctions in its part 1 rulemaking.

VI. Exclusion of Delinquent and Defaulted Debtors

    24. Petitions. Cook Inlet suggests that licensees that are 
delinquent or in default on their installment payment obligations in 
other services should be ineligible for special bidding provisions in 
LMDS. Cook Inlet's limitation would also apply to the delinquent and/or 
defaulting licensees' affiliates and attributable investors. Cook Inlet 
considers this particularly appropriate if installment payment plans 
are not offered, believing that a bidder that is prepared to pay in 
full should be required to dedicate those funds to the satisfaction of 
an existing Commission obligation before acquiring new licenses. Cook 
Inlet asserts that ``bidders should not expect that delinquency or 
default exists as a money management system in one auction without 
consequence in another.'' Cook Inlet accordingly suggests that the 
Commission require entities that are seeking favorable provisions in 
the LMDS auction to certify on their short-form applications (FCC Form 
175) that neither they nor their affiliates or attributable investors 
are delinquent or in default on any Commission competitive bidding 
installment payment obligation.
    25. Discussion. The Commission declines to further address the 
qualifications of licensees that are delinquent or in default on other 
FCC licenses for obtaining favorable provisions for the LMDS auction. 
The Commission agrees with Cook Inlet that, as a matter of policy, it 
may be desirable to exclude licensees that have defaulted on existing 
obligations from further favorable small business provisions. However, 
the Commission has already amended Sec. 1.2105(a) of its part 1 rules 
to indicate that ``an applicant's signature on FCC Form 175 or its 
electronic submission of this form will serve to certify that the 
applicant is not in default on any payment for Commission licenses 
(including down payments) and that it is not delinquent on any non-tax 
debt owed to any federal agency.'' Moreover, Sec. 1.2105(a)(2)(v) of 
the Commission's part 1 rules requires a certification that the 
applicant is legally, technically, financially and otherwise qualified 
to bid. The Commission therefore believes that its existing rules 
address this issue.

VII. Supplemental Final Regulatory Flexibility Analysis

    26. As required by the Regulatory Flexibility Act, 5 U.S.C. 603 
(``RFA''), a Final Regulatory Flexibility Analysis (``FRFA'') was 
incorporated in Appendix D of the LMDS Second Report and Order in this 
proceeding. The Commission's Supplemental Final Regulatory Flexibility 
Analysis (``SFRFA'') in this Second Order on Reconsideration reflects 
revised or additional information to that contained in the FRFA, and 
incorporates the FRFA by reference. The SFRFA is thus limited to 
matters raised in petitions for reconsideration of the LMDS Second 
Report and Order and addressed in the Second Order on Reconsideration. 
This SFRFA conforms to the RFA, as amended by the Contract with America 
Advancement Act of 1996 (``CWAAA''), Public Law 104-121, 110 Stat. 846 
(1996). Title II of the CWAAA is the ``Small Business Regulatory 
Enforcement Fairness Act of 1996,'' codified at 5 U.S.C. 601 et seq.

A. Need For, and Objectives of, the Second Order on Reconsideration

    27. This Second Order on Reconsideration is issued in response to 
certain petitions for reconsideration of the LMDS Second Report and 
Order. The revisions in the Commission's rules made in the Second Order 
on Reconsideration are intended to address concerns raised in the 
record concerning the competitive bidding rules for LMDS, while 
otherwise reaffirming the Commission's commitment to the rapid 
implementation of LMDS throughout the United States.

B. Summary of Significant Issues Raised by the Public Comments in 
Response to the Final Regulatory Flexibility Statement

    28. No comments were received in direct response to the FRFA, but 
the Second Order on Reconsideration addresses three petitions for 
reconsideration of the LMDS Second Report and Order that raise issues 
affecting small businesses. One petitioner asks that the Commission 
reconsider its rules making installment payments available to small 
business LMDS licensees and replace the installment payment plans with 
heightened bidding credits. Contrary to that request, another 
petitioner requests that the Commission augment its LMDS installment 
payment plan with an additional ``deferred incremental repayment'' 
installment payment option delaying payment of principal until late in 
the license term. One petitioner supporting retention of installment 
payments alternatively suggests that the Commission adopt higher 
bidding credits if installment payments are eliminated. Two petitioners 
ask that the Commission reconsider its rules defining small business 
size categories and that it consider establishing additional categories 
for very small businesses, with heightened bidding credits and/or more 
favorable installment payment terms. One of those petitioners also 
requests that the Commission adopt an asset test to distinguish between 
the various existing and proposed small business size categories. 
Finally, one petitioner asks that the Commission hold licensees that 
are delinquent or in default on their installment payment obligations 
in other services ineligible for special bidding preferences in LMDS. 
Oppositions, replies to oppositions, and ex parte comments were filed 
in response to the petitions and were considered before a decision was 
reached.

C. Description and Estimate of the Number of Small Entities to Which 
Rules Will Apply

    29. As in the FRFA, the service regulations the Commission adopts 
to implement LMDS would apply to all entities seeking an LMDS license. 
As discussed in the FRFA, using the Small Business Administration 
(``SBA'') definitions applicable to radiotelephone

[[Page 48793]]

companies and to cable and pay television services, the majority of 
LMDS entities to provide video distribution and telecommunications 
services may be small businesses. See FRFA at 8-10.
    30. The commission had not developed a more refined definition of 
small entities applicable to LMDS prior to the LMDS Second Report and 
Order because LMDS is a new service. The RFA amendments were not in 
effect until shortly before the Fourth NPRM in this proceeding was 
released. Rulemaking to Amend Parts 1, 2, 21, and 25 of the 
Commission's Rules to Redesignate the 27.5-29.5 GHz Frequency Band, to 
Reallocate the 29.5-30.0 GHz Frequency Band, to Establish Rules and 
Policies for Local Multipoint Distribution Service and for Fixed 
Satellite Services, CC Docket No. 92-297, First Report and Order and 
Fourth Notice of Proposed Rulemaking, 61 FR 39425 (July 29, 1996). No 
data has been received establishing the number of small businesses 
associated with LMDS. However, in the Third NPRM in this proceeding, 
the Commission proposed to auction the spectrum for assignment and 
requested information regarding the potential number of small 
businesses interested in obtaining LMDS spectrum, in order to determine 
their eligibility for special provisions such as bidding credits and 
installment payments to facilitate participation of small entities in 
the auction process. Rulemaking to Amend Parts 1, 2, 21, and 25 of the 
Commission's Rules to Redesignate the 27.5-29.5 GHz Frequency Band, to 
Reallocate the 29.5-30.0 GHz Frequency Band, to Establish Rules and 
Policies for Local Multipoint Distribution Service and for Fixed 
Satellite Services, CC Docket No. 92-297, and Suite 12 Petition for 
Pioneer's Preference, PP-22, Third Notice of Proposed Rulemaking and 
Supplemental Tentative Decision, 60 FR 43740 (August 23, 1995) (``Third 
NPRM''). In the LMDS Second Report and Order the Commission adopted 
criteria for defining small businesses for purposes of determining such 
eligibility. The Commission will use this definition for estimating the 
potential number of entities applying for auctionable spectrum that are 
small businesses.
    31. In Section II.D.2.e. of the LMDS Second Report and Order the 
Commission adopted criteria for defining small businesses and other 
eligible entities for purposes of defining eligibility for bidding 
credits and installment payments. The Commission defined a small 
business as an entity that, together with affiliates and controlling 
principals, has average gross revenues not exceeding $40 million for 
the three preceding years. Additionally, bidding credits and 
installment payments were made available to applicants that, together 
with affiliates and controlling principals, have average gross revenues 
for the three preceding years of more than $40 million but not more 
than $75 million (``entrepreneurs''). In the Second Order on 
Reconsideration the Commission adopts a ``very small business'' 
category. A very small business is defined as an entity that, together 
with controlling principals and affiliates, has average annual gross 
revenues for the three preceding years of not more than $15 million. 
These entities were previously included within the small business 
definition. The SBA has not yet approved these definitions in the 
context of LMDS. The definitions have received SBA approval in the 
context of broadband Personal Communications Services (``PCS'').
    32. No parties submitting or commenting on the petitions giving 
rise to the Second Order on Reconsideration commented on the potential 
number of entities that would be very small businesses, and the 
Commission is unable to predict accurately the number of applicants for 
LMDS that would fit the definition of a small business or very small 
business for competitive bidding purposes. However, in the FRFA, the 
Commission estimated the number of applicants that are small businesses 
based on the rules for the Multipoint Distribution Service (``MDS''), 
which use the same size standard as was adopted for LMDS. In MDS, a 
small business is ``an entity that together with its affiliates has 
average annual gross revenues that are not more than $40 million for 
the preceding three years.'' Amendment of Parts 21 and 74 of the 
Commission's Rules With Regard to Filing Procedures in the Multipoint 
Distribution Service and in the Instructional Fixed Television Service, 
MM Docket No. 94-131, Implementation of Section 309(j) of the 
Communications Act--Competitive Bidding, PP Docket No. 93-253, Report 
and Order, 60 FR 36524 (July 17, 1995), adopting 47 CFR 
Sec. 21.961(b)(1). A total of 154 applications were received in the MDS 
auction, of which 141, or 92 percent, qualified as small businesses. 
MDS rules did not provide a very small business definition. The 
Commission notes, however, that in the broadband PCS F Block rules, it 
adopted a very small business definition like the one adopted for LMDS. 
Amendment of Parts 20 and 24 of the Commission's Rules--Broadband PCS 
Competitive Bidding and the Commercial Mobile Radio Service Spectrum 
Cap, WT Docket No. 96-59, Amendment of the Commission's Cellular/PCS 
Cross-Ownership Rule, GN Docket No. 90-314, Report and Order, 61 FR 
33859 (July 1, 1996), adopting 47 CFR Sec. 24.720(b)(2). In the 
broadband PCS F Block auction, 53.9 percent of the applicants were very 
small businesses. Specifically, 82 of 152 applicants in the broadband 
PCS F Block auction, and 70 of the 125 winners (56 percent), were very 
small businesses.
    33. The Commission plans to issue two licenses for each of the 492 
BTAs, excluding New York, that are the geographic basis for licensing 
LMDS. Thus, 984 licenses will be made available for authorization in 
the LMDS auction. Inasmuch as 92 percent of the applications received 
in the MDS auction were from entities qualifying as small businesses, 
the Commission anticipates receiving at least the same proportion of 
applications from small business entities seeking LMDS licenses. 
Further, as many as 53.9 percent of these entities could be very small 
businesses.

D. Description of Projected Reporting, Recordkeeping, and Other 
Compliance Requirements

    34. These descriptions will remain unchanged, for purposes of this 
Second Order on Reconsideration, from those in the FRFA.

E. Steps Taken to Minimize Significant Economic Impact on Small 
Entities, and Significant Alternatives Considered

    35. While installment payment plans for small entities in LMDS are 
eliminated in the Second Order on Reconsideration, the Commission found 
that better alternatives to assist small businesses, as well as ensure 
provision of new services to the public, are to raise bidding credits 
for existing categories of small entities and adopt an additional 
category for very small businesses. The Commission agrees with the 
suggestions of two petitioners that bidding credits of sufficient size 
will enable small businesses to secure private financing. This 
suggestion is consistent with the Commission's experience in other 
auctions in which installment payments were not offered and small 
entities nevertheless have been successful. The Commission notes, for 
example, the auction of Wireless Communications Service licenses, for 
which bidding credits were heightened to accommodate the lack of 
installment payments. Amendment of the Commission's Rules to Establish 
Part 27, the Wireless Communications Service (``WCS''), GN Docket No. 
96-228, Report and Order, 62 FR 9636 (March 3, 1997).

[[Page 48794]]

Prior to the Second Order on Reconsideration, bidding credits of 15 
percent were offered to entrepreneurs, and 25 percent to small 
businesses. The Commission now offers bidding credits of 25 percent for 
entrepreneurs, 35 percent for small businesses, and 45 percent for very 
small businesses. As noted in the Second Order on Reconsideration, it 
is difficult to calculate accurately the net present value of an 
installment payment plan (which value would depend on several 
variables, including future commercial interest rates), and the 
Commission does not in any event commit to an exact accommodation or 
reimbursement of the value of installment payments. Additionally, the 
adoption of a category for very small businesses, featuring a bidding 
credit higher than those offered to small businesses and entrepreneurs, 
will serve as an effective method of leveling the competitive imbalance 
between those entities, as well as allowing very small businesses to 
compete more effectively with large entities. Since the Commission 
decided not to offer installment payments in LMDS, it rejected as moot 
both the suggestion of a deferred incremental repayment option and the 
suggestion of a favorable interest rate for very small businesses.
    36. The Commission disagreed with the assertion that small 
businesses would require a 50 percent bidding credit to attract private 
financing in the absence of installment payments. This assertion is 
unsupported and is at odds with the levels suggested by another 
petitioner as being sufficient to attract private financing without 
installment payments. The levels of bidding credits adopted offer a 
reasonable accommodation for the elimination of installment payments 
and constitute a reasonable compromise between the levels suggested in 
lieu thereof. Also, although adopting the suggestion of an additional 
category for very small businesses, the Commission rejected the 
suggestion of a second additional category for entities that, together 
with controlling principals and affiliates, have average annual gross 
revenues for the three preceding years of not more than $3 million. 
This suggestion, which was part of an ex parte comment and not 
significantly elucidated, would create, in essence, a ``very, very 
small business'' category that would add another layer of complexity 
with little apparent countervailing benefit to bidders.
    37. The Commission also declined to adopt an asset test to 
distinguish between the small business size categories. Assets, being 
potentially fluid and subject to inconsistent valuation, are generally 
less ascertainable than gross revenues or numbers of employees. 
Although the Commission has adopted an asset test for eligibility for 
particular blocks of licenses in broadband PCS auctions, it has never 
employed an asset test in its small business size standards. Nor does 
the SBA employ an asset test in its business size standards, except in 
the context of national and commercial banks, savings institutions, and 
credit unions (for which asset reporting obligations exist for other 
regulatory purposes). 13 CFR Sec. 121.201, Standard Industrial 
Classifications 6021-6082 and n.7.
    38. Finally, the Commission declined to further address the 
qualifications of licensees that are delinquent or in default on FCC 
licenses in other services for obtaining favorable provisions for the 
LMDS auction. While the Commission agrees that, as a matter of policy, 
it may be desirable to exclude licensees that have defaulted on 
existing obligations from further small business provisions, its 
existing rules already address this issue. An applicant's signature on 
FCC Form 175 or its electronic submission of that form serves to 
certify that the applicant is not in default on any payment for 
Commission licenses (including down payments), that it is not 
delinquent on any non-tax debt owed to any federal agency, and that it 
is legally, technically, financially and otherwise qualified to bid. 47 
CFR 1.2105(a)(2)(x) and (v).

VIII. Report to Congress

    39. The Commission will enclose a copy of the Second Order on 
Reconsideration, including this SFRFA, in a report to be sent to 
Congress pursuant to the Small Business Regulatory Enforcement Fairness 
Act. 5 U.S.C. 801(a)(1)(A). A copy of the Second Order on 
Reconsideration and this SFRFA (or summary thereof) will also be 
published in the Federal Register and will be sent to the Chief Counsel 
for Advocacy of the SBA. 5 U.S.C. 604(b).

IX. Ordering Clauses

    40. Accordingly, it is ordered that the Petition for Partial 
Reconsideration filed by WebCel Communications, Inc., is granted in 
part and denied in part; the Petition for Reconsideration filed by Cook 
Inlet Region, Inc., is granted in part and denied in part; and the 
Petition for Partial Reconsideration filed by CellularVision USA, Inc., 
is granted in part and denied in part.
    41. It is further ordered that part 101 of the Commission's Rules 
is amended as set forth below.
    42. It is further ordered that the rule changes made herein will 
become effective November 17, 1997. This action is taken pursuant to 
Section 4(i), 303(r) and 309(j) of the Communications Act of 1934, as 
amended, 47 U.S.C. 154(i), 303(r) and 309(j).
    43. It is further ordered that the Commission shall send a copy of 
this Second Order on Reconsideration, including the Supplemental Final 
Regulatory Flexibility Analysis, to the Chief Counsel for Advocacy of 
the Small Business Administration.

List of Subjects in 47 CFR Part 101

    Fixed microwave service.

Federal Communications Commission.
William F. Caton,
Acting Secretary.

Rule Changes

    Part 101 of title 47 of the Code of Federal Regulations is amended 
as follows:

PART 101--FIXED MICROWAVE SERVICE

    1. The authority citation continues to read as follows:

    Authority: 47 U.S.C. Sections 154, 303.

    2. Section 101.1105 is revised to read as follows:


Sec. 101.1105  Submission of payments.

    (a) Each applicant to participate in an LMDS auction will be 
required to submit an upfront payment in accordance with Sec. 1.2106 of 
this chapter as announced by the Wireless Telecommunications Bureau by 
Public Notice.
    (b) Winning bidders in LMDS auctions must submit a down payment to 
the Commission in an amount sufficient to bring their total deposits up 
to 20 percent of their winning bids within ten business days following 
the release of a Public Notice announcing the close of the auction. 
Winning bidders must pay the full balance of their winning bids within 
ten business days following the release of a Public Notice that the 
Commission is prepared to award the licenses.
    3. Section 101.1107 is revised to read as follows:


Sec. 101.1107  Bidding credits for very small businesses, small 
businesses and entrepreneurs; unjust enrichment.

    (a) A winning bidder that qualifies as a very small business or a 
consortium of very small businesses pursuant to Sec. 101.1112 may use a 
bidding credit of

[[Page 48795]]

45 percent to lower the cost of its winning bid.
    (b) A winning bidder that qualifies as a small business or a 
consortium of small businesses pursuant to Sec. 101.1112 may use a 
bidding credit of 35 percent to lower the cost of its winning bid.
    (c) A winning bidder that qualifies as an entrepreneur or a 
consortium of entrepreneurs pursuant to Sec. 101.1112 may use a bidding 
credit of 25 percent to lower the cost of its winning bid.
    (d) The bidding credits referenced in paragraphs (a), (b) and (c) 
of this section are not cumulative.
    (e) Unjust enrichment.
    (1) A licensee that utilizes a bidding credit, and that during the 
initial license term seeks to assign or transfer control of a license 
to an entity that does not meet the eligibility criteria for a bidding 
credit, will be required to reimburse the U.S. Government for the 
amount of the bidding credit, plus interest based on the rate for ten 
year U.S. Treasury obligations applicable on the date the license is 
granted, as a condition of Commission approval of the assignment or 
transfer. If, within the initial term of the license, a licensee that 
utilizes a bidding credit seeks to assign or transfer control of a 
license to an entity that is eligible for a lower bidding credit, the 
difference between the bidding credit obtained by the assigning party 
and the bidding credit for which the acquiring party would qualify, 
plus interest based on the rate for ten year U.S. Treasury obligations 
applicable on the date the license is granted, must be paid to the U.S. 
Government as a condition of Commission approval of the assignment or 
transfer. If, within the initial license term, a licensee that utilizes 
a bidding credit seeks to make any ownership change that would result 
in the licensee losing eligibility for a bidding credit (or qualifying 
for a lower bidding credit), the amount of the bidding credit (or the 
difference between the bidding credit originally obtained and the 
bidding credit for which the restructured licensee would qualify), plus 
interest based on the rate for ten year U.S. Treasury obligations 
applicable on the date the license is granted, must be paid to the U.S. 
Government as a condition of Commission approval of the ownership 
change.
    (2) The amount of payments made pursuant to paragraph (e)(1) of 
this section will be reduced over time as follows:
    (i) A transfer in the first two years of the license term will 
result in a forfeiture of 100 percent of the value of the bidding 
credit (or the difference between the bidding credit obtained by the 
original licensee and the bidding credit for which the post-transfer 
licensee is eligible);
    (ii) In year three of the license term the payment will be 75 
percent;
    (iii) In year four of the license term the payment will be 50 
percent; and
    (iv) In year five of the license term the payment will be 25 
percent, after which there will be no required payment.


Sec. 101.1108  [Removed and reserved]

    4. Section 101.1108 is removed and reserved.
    5. Section 101.1109 is revised to read as follows:


Sec. 101.1109  Certifications, disclosures, records maintenance and 
audits.

    (a) Short-form applications: certifications and disclosure. In 
addition to certifications and disclosures required in part 1, subpart 
Q, of this chapter, each applicant for an LMDS license which qualifies 
as a very small business, small business or entrepreneurs pursuant to 
Sec. 101.1112 shall append the following information as an exhibit to 
its short-form applications (FCC Form 175):
    (1) The identities of the applicant's affiliates and controlling 
principals; and
    (2) The applicant's gross revenues, computed in accordance with 
Sec. 101.1112.
    (b) Long-form applications: certifications and disclosure. In 
addition to the requirements in Sec. 1.2107 of this chapter, each 
applicant submitting a long-form application for an LMDS license and 
qualifying as a very small business, small business or entrepreneur 
pursuant to Sec. 101.1112 shall, in an exhibit to its long-form 
application:
    (1) Disclose separately and in the aggregate the gross revenues, 
computed in accordance with Sec. 101.1112, for each of the following: 
the applicant, the applicant's affiliates, the applicant's controlling 
principals, and, if a consortium of very small businesses, small 
businesses or entrepreneurs, the members of the consortium;
    (2) List and summarize all agreements or other instruments (with 
appropriate references to specific provisions in the text of such 
agreements and instruments) that support the applicant's eligibility as 
a very small business, small business or entrepreneur, including the 
establishment of de facto and de jure control; such agreements and 
instruments include, but are not limited to, articles of incorporation 
and bylaws, shareholder agreements, voting or other trust agreements, 
franchise agreements, and any other relevant agreements including 
letters of intent, oral or written; and
    (3) List and summarize any investor protection agreements, 
including rights of first refusal, supermajority clauses, options, veto 
rights, and rights to hire and fire employees and to appoint members to 
boards of directors or management committees.
    (c) Records maintenance. All winning bidders qualifying as very 
small businesses, small businesses or entrepreneurs shall maintain at 
their principal place of business an updated file of ownership, 
revenue, and asset information, including any document necessary to 
establish eligibility as a very small business, small business or 
entrepreneur. Licensees (and their successors-in-interest) shall 
maintain such files for the term of the license. Applicants that do not 
obtain the license(s) for which they applied shall maintain such files 
until the grant of such license(s) is final, or one year from the date 
of the filing of their short-form application (FCC Form 175), whichever 
is earlier.
    (d) Audits.
    (1) Applicants and licensees claiming eligibility as a very small 
business, small business or entrepreneur pursuant to Sec. 101.1112 
shall be subject to audits by the Commission. Selection for audit may 
be random, on information, or on the basis of other factors.
    (2) Consent to such audits is part of the certification included in 
the short-form application (FCC Form 175). Such consent shall include 
consent to the audit of the applicant's or licensee's books, documents 
and other material (including accounting procedures and practices) 
regardless of form or type, sufficient to confirm that such applicant's 
or licensee's representations are, and remain, accurate. Such consent 
shall include inspection at all reasonable times of the facilities, or 
parts thereof, engaged in providing and transacting business, or 
keeping records regarding licensed LMDS service, and shall also include 
consent to the interview of principals, employees, customers and 
suppliers of the applicant or licensee.
    6. Section 101.1112 is revised to read as follows:


Sec. 101.1112  Definitions.

    (a) Scope. The definitions in this section apply to Secs. 101.1101 
through 101.1112, unless otherwise specified in those sections.
    (b) Very small business. A very small business is an entity that, 
together with its affiliates and controlling principals, has average 
gross revenues for the three preceding years of not more than $15 
million.

[[Page 48796]]

    (c) Small business. A small business is an entity that, together 
with its affiliates and controlling principals, has average gross 
revenues for the three preceding years of more than $15 million but not 
more than $40 million.
    (d) Entrepreneur. An entrepreneur is an entity that, together with 
its affiliates and controlling principals, has average gross revenues 
for the three preceding years of more than $40 million but not more 
than $75 million.
    (e) For purposes of determining whether an entity meets the 
definition of very small business, small business or entrepreneur, the 
gross revenues of the applicant, its affiliates and controlling 
principals shall be considered on a cumulative basis and aggregated.
    (f) Consortium. A consortium of very small businesses, small 
businesses or entrepreneurs is a conglomerate organization formed as a 
joint venture between or among mutually independent business firms, 
each of which individually satisfies the definition of a very small 
business, small business or entrepreneur. Each individual member must 
establish its eligibility as a very small business, small business or 
entrepreneur. Where an applicant (or licensee) is a consortium of very 
small businesses, small businesses or entrepreneurs, the gross revenues 
of each business shall not be aggregated.
    (g) Gross revenues. Gross revenues shall mean all income received 
by an entity, whether earned or passive, before any deductions are made 
for costs of doing business (e.g., cost of goods sold), as evidenced by 
audited financial statements for the relevant number of most recently 
completed calendar years, or, if audited financial statements were not 
prepared on a calendar-year basis, for the most recently completed 
fiscal years preceding the filing of the applicant's short-form 
application (FCC Form 175). If an entity was not in existence for all 
or part of the relevant period, gross revenues shall be evidenced by 
the audited financial statements of the entity's predecessor-in-
interest or, if there is no identifiable predecessor-in-interest, 
unaudited financial statements certified by the applicant as accurate. 
When an applicant does not otherwise use audited financial statements, 
its gross revenues may be certified by its chief financial officer or 
its equivalent.
    (h) Affiliate.
    (1) Basis for affiliation. An individual or entity is an affiliate 
of an applicant if such individual or entity:
    (i) Directly or indirectly controls or has the power to control the 
applicant;
    (ii) Is directly or indirectly controlled by the applicant;
    (iii) Is directly or indirectly controlled by a third party or 
parties who also control or have the power to control the applicant; or
    (iv) Has an ``identity of interest'' with the applicant.
    (2) Nature of control in determining affiliation.
    (i) Every business concern is considered to have one or more 
parties who directly or indirectly control or have the power to control 
it. Control may be affirmative or negative and it is immaterial whether 
it is exercised so long as the power to control exists.

    Example for paragraph (h)(2)(i). An applicant owning 50 percent 
of the voting stock of another concern would have negative power to 
control such concern since such party can block any action of the 
other stockholders. Also, the bylaws of a corporation may permit a 
stockholder with less than 50 percent of the voting stock to block 
any actions taken by the other stockholders in the other entity. 
Affiliation exists when the applicant has the power to control a 
concern while at the same time another person, or persons, are in 
control of the concern at the will of the party or parties with the 
power of control.

    (ii) Control can arise through stock ownership; occupancy of 
director, officer, or key employee positions; contractual or other 
business relations; or combinations of these and other factors. A key 
employee is an employee who, because of her position in the concern, 
has a critical influence in or substantive control over the operations 
or management of the concern.
    (iii) Control can arise through management positions if the voting 
stock is so widely distributed that no effective control can be 
established.

    Example for paragraph (h)(2)(iii). In a corporation where the 
officers and directors own various size blocks of stock totaling 40 
percent of the corporation's voting stock, but no officer or 
director has a block sufficient to give him control or the power to 
control and the remaining 60 percent is widely distributed with no 
individual stockholder having a stock interest greater than 10 
percent, management has the power to control. If persons with such 
management control of the other entity are controlling principals of 
the applicant, the other entity will be deemed an affiliate of the 
applicant.

    (3) Identity of interest between and among persons. Affiliation can 
arise between or among two or more persons with an identity of 
interest, such as members of the same family or persons with common 
investments. In determining if the applicant controls or is controlled 
by a concern, persons with an identity of interest will be treated as 
though they were one person.
    (i) Spousal affiliation. Both spouses are deemed to own or control 
or have the power to control interests owned or controlled by either of 
them, unless they are subject to a legal separation recognized by a 
court of competent jurisdiction in the United States.
    (ii) Kinship affiliation. Immediate family members will be presumed 
to own or control or have the power to control interests owned or 
controlled by other immediate family members. In this context 
``immediate family member'' means father, mother, husband, wife, son, 
daughter, brother, sister, father-or mother-in-law, son-or daughter-in-
law, brother-or sister-in-law, step-father or -mother, step-brother or 
-sister, step-son or -daughter, and half-brother or -sister. This 
presumption may be rebutted by showing that:
    (A) The family members are estranged;
    (B) The family ties are remote; or
    (C) The family members are not closely involved with each other in 
business matters.

    Example for paragraph (h)(3)(ii). A owns a controlling interest 
in Corporation X. A's sister-in-law, B, has a controlling interest 
in an LMDS license application. Because A and B have a presumptive 
kinship affiliation, A's interest in Corporation X is attributable 
to B, and thus to the applicant, unless B rebuts the presumption 
with the necessary showing.

    (4) Affiliation through stock ownership.
    (i) An applicant is presumed to control or have the power to 
control a concern if she owns or controls or has the power to control 
50 percent or more of its voting stock.
    (ii) An applicant is presumed to control or have the power to 
control a concern even though he owns, controls, or has the power to 
control less than 50 percent of the concern's voting stock, if the 
block of stock she owns, controls, or has the power to control is large 
as compared with any other outstanding block of stock.
    (iii) If two or more persons each owns, controls or has the power 
to control less than 50 percent of the voting stock of a concern, such 
minority holdings are equal or approximately equal in size, and the 
aggregate of these minority holdings is large as compared with any 
other stock holding, the presumption arises that each one of these 
persons individually controls or has the power to control the concern; 
however, such presumption may be rebutted by a showing that such 
control or power to control, in fact, does not exist.
    (5) Affiliation arising under stock options, convertible 
debentures, and agreements to merge. Stock options, convertible 
debentures, and agreements

[[Page 48797]]

to merge (including agreements in principle) are generally considered 
to have a present effect on the power to control the concern. 
Therefore, in making a size determination, such options, debentures, 
and agreements will generally be treated as though the rights held 
thereunder had been exercised. However, neither an affiliate nor an 
applicant can use such options and debentures to appear to terminate 
its control over another concern before it actually does so.

    Example 1 for paragraph (h)(5). If company B holds an option to 
purchase a controlling interest in company A, which holds a 
controlling interest in an LMDS applicant, the situation is treated 
as though company B had exercised its rights and had become owner of 
a controlling interest in company A. The gross revenues of company B 
must be taken into account in determining the size of the applicant.
    Example 2 for paragraph (h)(5). If a large company, BigCo, holds 
70 percent (70 of 100 outstanding shares) of the voting stock of 
company A, who holds a controlling interest in an LMDS license 
applicant, and gives a third party, SmallCo, an option to purchase 
50 of the 70 shares owned by BigCo, BigCo will be deemed to be an 
affiliate of company A, and thus the applicant, until SmallCo 
actually exercises its options to purchase such shares. In order to 
prevent BigCo from circumventing the intent of the rule, which 
requires such options to be considered on a fully diluted basis, the 
option is not considered to have present effect in this case.
    Example 3 for paragraph (h)(5). If company A has entered into an 
agreement to merge with company B in the future, the situation is 
treated as though the merger has taken place.

    (6) Affiliation under voting trusts.
    (i) Stock interests held in trust shall be deemed controlled by any 
person who holds or shares the power to vote such stock, to any person 
who has the sole power to sell such stock, and to any person who has 
the right to revoke the trust at will or to replace the trustee at 
will.
    (ii) If a trustee has a familial, personal or extra-trust business 
relationship to the grantor or the beneficiary, the stock interests 
held in trust will be deemed controlled by the grantor or beneficiary, 
as appropriate.
    (iii) If the primary purpose of a voting trust, or similar 
agreement, is to separate voting power from beneficial ownership of 
voting stock for the purpose of shifting control of or the power to 
control a concern in order that such concern or another concern may 
meet the Commission's size standards, such voting trust shall not be 
considered valid for this purpose regardless of whether it is or is not 
recognized within the appropriate jurisdiction.
    (7) Affiliation through common management. Affiliation generally 
arises where officers, directors, or key employees serve as the 
majority or otherwise as the controlling element of the board of 
directors or the management (or both) of another entity.
    (8) Affiliation through common facilities. Affiliation generally 
arises where one concern shares office space, employees, or other 
facilities (or any combination of the foregoing) with another concern, 
particularly where such concerns are in the same or related industry or 
field of operations, or where such concerns were formerly affiliated, 
and through these sharing arrangements one concern has control, or 
potential control, of the other concern.
    (9) Affiliation through contractual relationships. Affiliation 
generally arises where one concern is dependent upon another concern 
for contracts and business to such a degree that one concern has 
control, or potential control.
    (10) Affiliation under joint venture arrangements. A joint venture 
for size determination purposes is an association of concerns or 
individuals (or both), with interests in any degree or proportion, 
formed by contract, express or implied, to engage in and carry out a 
single, specific business venture for joint profit for which purpose 
they combine their efforts, property, money, skill and knowledge, but 
not on a continuing or permanent basis for conducting business 
generally. The determination whether an entity is a joint venture is 
based upon the facts of the business operation, regardless of how the 
business operation may be designated by the parties involved. An 
agreement to share profits/losses proportionate to each party's 
contribution to the business operation is a significant factor in 
determining whether the business operation is a joint venture.
    (11) Exclusion from affiliation coverage. For purposes of this 
section, Indian tribes or Alaska Regional or Village Corporations 
organized pursuant to the Alaska Native Claims Settlement Act (43 
U.S.C. 1601 et seq.), or entities owned and controlled by such tribes 
or corporations, are not considered affiliates of an applicant (or 
licensee) that is owned and controlled by such tribes, corporations or 
entities, and that otherwise complies with the requirements of this 
section, except that gross revenues derived from gaming activities 
conducted by affiliated entities pursuant to the Indian Gaming 
Regulatory Act (25 U.S.C. 2701 et seq.) will be counted in determining 
such applicant's (or licensee's) compliance with the financial 
requirements of this section, unless such applicant establishes that it 
will not receive a substantial unfair competitive advantage because 
significant legal constraints restrict the applicant's ability to 
access such gross revenues.

[FR Doc. 97-24789 Filed 9-16-97; 8:45 am]
BILLING CODE 6712-01-P