[Federal Register Volume 66, Number 32 (Thursday, February 15, 2001)]
[Rules and Regulations]
[Pages 10374-10377]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-3786]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 27

[WT Docket No. 99-168; FCC 00-330]


Service Rules for the 746-764 and 776-794 MHz Bands

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: By this document, the Commission dismisses a petition for 
reconsideration as moot and adopts a special rule on default payments 
for auctions of licenses in the 746-764 and 776-794 MHz Bands using a 
package bidding design.

DATES: February 15, 2001.

FOR FURTHER INFORMATION CONTACT: Howard Davenport, Attorney, Auctions 
Legal Branch at (202) 418-0660.

SUPPLEMENTARY INFORMATION: This is a summary of a Second Memorandum 
Opinion and Order (Second MO&O) in the Amendment of the Commission's 
Rules Regarding Service Rules for the 746-764 and 776-794 MHz Bands. 
The complete text of the Second MO&O is available for inspection and 
copying during normal business hours in the FCC Reference Center (Room 
CY-A257), 445 12th Street, SW., Washington, DC. It may also be 
purchased from the Commission's copy contractor, International 
Transcription Services, Inc. (ITS, Inc.), 1231 20th Street, NW., 
Washington, DC 20036, (202) 857-3800. It is also available on the 
Commission's web site at http://www.fcc.gov/wtb/auctions.

Synopsis of the Second Memorandum Opinion and Order

I. Introduction

    1. In this Second Memorandum Opinion and Order (Second MO&O), we 
address a petition for reconsideration

[[Page 10375]]

asking that in the auction of licenses in the 747-762 and 777-792 MHz 
bands (``Auction No. 31''), we apply to bidders that seek a 20 MHz 
nationwide aggregation any limits on bid withdrawal payments made 
available to bidders that seek a nationwide 30 MHz aggregation. We also 
address the question whether the competitive bidding rules, 
particularly the default payment rule, need to be modified for Auction 
No. 31 in light of the decision of the Wireless Telecommunications 
Bureau (``the Bureau'') to offer combinatorial (package) bidding for 
this auction.
    2. In an earlier ruling in this docket, we found that in designing 
the procedures for Auction No. 31, we should not use a combinatorial 
(package) bidding design because of the time required to further 
develop such an auction design. See 700 MHz First Report and Order, 65 
FR 3139 (January 20, 2000). Instead, we directed the Bureau to adopt, 
if operationally feasible, a special nationwide bid withdrawal 
procedure to limit the exposure of bidders seeking a 30 megahertz 
nationwide aggregation. In response to this ruling, one party filed a 
petition for reconsideration. In the 700 MHz MO&O, 65 FR 42879 (July 
12, 2000), we deferred ruling on the petition and stated that the 
Bureau may implement a combinatorial bidding design for Auction No. 31, 
if appropriate. In that regard, the Bureau issued a Auction No. 31 
Package Bidding Comment Public Notice, 65 FR 35636 (June 5, 2000), that 
sought comment on procedures for implementing combinatorial (package) 
bidding for Auction No. 31. The Auction No. 31 Package Bidding Comment 
Public Notice also sought comment on application to a package bidding 
auction of the general competitive bidding rules regarding default. 
After careful review of the comments, the Bureau issued a Auction No. 
31 Package Bidding Procedures Public Notice, 65 FR 43361 (July 13, 
2000), that set forth specific procedures for conducting a simultaneous 
multiple round auction with combinatorial or package bids. For the 
reasons set forth, we dismiss the petition as moot and adopt a special 
default payment rule for Auction No. 31.

II. US West Petition for Reconsideration

A. Background
    3. In the 700 MHz First Report and Order, we adopted service and 
auction rules for the commercial use of the 746-764 MHz and 776-794 MHz 
bands. These bands had been reallocated from use solely for broadcast 
service. The new service rules established 12 licenses (six regional 
licenses of 10 MHz each and six regional licenses of 20 MHz each) for 
the 30 megahertz of spectrum in the 747-762 MHz and 777-792 MHz bands. 
In that ruling, we noted that there may be bidders that do not wish to 
acquire any licenses if they cannot acquire a nationwide aggregation of 
30 MHz licenses. We further noted that the bid withdrawal provisions of 
our general competitive bidding rules at part 1, subpart Q, might 
discourage bidders from attempting a nationwide aggregation. To address 
this concern, we directed the Bureau to adopt, if operationally 
feasible, a nationwide bid withdrawal procedure to limit the exposure 
of bidders that seek a 30 MHz aggregation. The Bureau adopted such a 
procedure. See Auction No. 31 Procedures Public Notice 65 FR 12251 
(March 8, 2000). The petition asks that we apply the same nationwide 
bid withdrawal provisions to any bidder that seeks a 20 MHz nationwide 
aggregation, as may be applied to a bidder seeking a 30 MHz nationwide 
aggregation.
B. Discussion
    4. In the Auction No. 31 Package Bidding Procedures Public Notice, 
the Bureau determined that bidders may place bids on individual 
licenses and may also place bids on up to twelve different packages of 
each bidder's choosing. By providing for package bidding, the Bureau 
has addressed the problem that may exist for a bidder that desires all 
or none of the licenses in a particular aggregation. For example, a 
bidder that seeks a 20 MHz or a 30 MHz nationwide aggregation can now 
bid on a package that includes these licenses and thus avoid the risk 
of winning only some of the desired licenses. Because, under package 
bidding, bidders that seek a 30 MHz nationwide aggregation no longer 
run the risk of being left with unwanted licenses in a failed 
nationwide aggregation, we conclude that the 30 MHz nationwide bid 
withdrawal procedure established by the Bureau at our direction is no 
longer necessary and the Bureau need not apply the procedure in Auction 
No. 31. Because the Bureau stated that, upon Commission approval, it 
will not apply the nationwide bid withdrawal procedure in Auction No. 
31, the request that we implement a similar bid withdrawal procedure 
for 20 MHz aggregation is moot. Accordingly, we dismiss the petition.

III. Default

A. Introduction
    5. In the 700 MHz MO&O, we stated that we would adopt any necessary 
rule changes after the Bureau had determined whether to implement 
package bidding for Auction No. 31. In the Auction No. 31 Package 
Bidding Comment Public Notice, the Bureau sought comment on application 
of the Commission's rules regarding bidder defaults. We received three 
comments and one reply comment on this issue.
B. Licenses Subject to Auction After a Default
    6. Under our part 1 auction rules, if a bidder defaults on a bid 
(or bids), we may sell the license(s) for the spectrum in a new 
auction. For Auction No. 31, the Bureau proposed that if a bidder 
defaults on a package bid, it would auction the licenses making up the 
package on which the party defaulted, and only those licenses. The 
Bureau would do this even if, under the package bidding procedures, a 
different set of packages would have won had the defaulting bidder not 
bid. For example, if the winning set of bids contains a 20 MHz 
nationwide package and a 10 MHz nationwide package, and the 20 MHz 
winner then defaults, the Bureau would auction only the six licenses 
making up the nationwide 20 MHz package. The 10 MHz package would be 
unaffected. The Bureau proposed to take this approach even if, had the 
20 MHz winner not submitted its winning bid, the licenses would have 
been sold in a different set of packages (for example, the six 30 MHz 
regional packages).
    7. Two parties file joint comments objecting to this proposal. They 
are concerned that bidders may strategically default, and argue that we 
should not award any licenses after a default unless the non-defaulting 
winners clearly would have won absent the default. They instead propose 
that we ``rewind'' the auction to before the round where it is clear 
the defaulting bidder was attempting to manipulate the outcome.
    8. While we recognize the possibility that a bidder may attempt to 
strategically default, we are not inclined to adopt the proposal that 
we ``rewind'' the auction. We believe that attempting to ``rewind'' an 
auction would be largely unworkable and unreasonable. First, bidders 
may default for other reasons, and determining when a bidder began 
``manipulating'' the outcome, if indeed it was attempting to do so, 
could be extremely difficult. Second, if the auction were subject to 
being ``rewound'' in the event of a default, the prevailing bidders 
would be only

[[Page 10376]]

contingent winners until all long form applications were approved and 
all money was paid, possibly some months after the auction closed. For 
each winner, the contingency would not be under the winner's control, 
but rather would depend on the actions of others. Moreover, all 
bidders, both those that prevailed and those that did not, would have 
to be at the ready during this time to continue the auction from the 
point to where it was unwound. We therefore do not believe that this 
proposal is feasible.
    9. We also believe that these joint commenters underestimate the 
deterrence value of the current default rule. We believe that the 
better course is to increase the additional default payment rather than 
attempt to ``rewind'' the auction.
    10. No other commenter supports the proposal to rewind the auction, 
nor does any other commenter object to this portion of the proposal. 
Moreover, these joint commenters note that any alternative following a 
default (including its own) is problematic. Accordingly, we adopt the 
procedure proposed in the Auction No. 31 Package Bidding Comment Public 
Notice to hold another auction only for the license(s) on which bidders 
default.
C. Calculation of Default Payments
    11. The Commission's rules provide that if a bidder defaults, it is 
liable for a default payment that contains a deficiency portion, equal 
to the difference between the amount it bid and the amount of the 
winning bid the next time the Commission offers the license, plus an 
additional payment, equal to three percent of the subsequent winning 
bid (or three percent of the bidder's bid, whichever is less). Default 
payments are calculated on a license-by-license basis; that is, where a 
bidder that defaults has more than one winning bid, the payments are 
calculated separately for each bid. Gains realized from the subsequent 
auction of licenses for which the subsequent winning bid is higher than 
the defaulter's bid are not used to offset losses incurred on those 
licenses for which the winning bid is lower than the defaulter's bid.
    12. In an auction with package bidding, a bidder that bids on a 
package is not placing separate bids on the individual licenses making 
up that package. Thus, in an auction with package bidding, it is not 
possible to apply the default rules in the same manner as they are 
applied in a simultaneous multiple round auction without package 
bidding. The Bureau therefore proposed to modify the default rules for 
Auction No. 31 as follows. Where a bidder defaults on a package bid(s), 
the payment would be calculated on a bid-by-bid basis, rather than on a 
license-by-license basis. The deficiency portion would be equal to the 
difference between the amount bid for the package and the amount of the 
subsequent winning bid for the same package or the aggregate of the 
subsequent winning bids for the licenses that make up the package. The 
Bureau also proposed that, similar to the rule for individual licenses, 
if a bidder defaults on two or more packages, the default payment due 
for each defaulted package would be calculated separately and would not 
be not offset against one another. If one package was subsequently 
auctioned for more than the original package bid amount and the other 
package subsequently was auctioned for less, the excess bid price from 
the first package would not be used to reduce the amount owed on the 
second package.
    13. We will not alter the rule for calculating default payments 
when a bidder has defaulted on more than one license or package. For 
the reasons we expressed in the BDPCS MO&O, 15 FCC Rcd. 17590 (2000), 
we believe that the rule is a correct one. However, the rule needs to 
be modified with respect to how we will calculate default payments 
when, after default(s) by one or more bidders, the affected licenses 
are won in different packages or groupings in the subsequent auction, 
particularly in light of the Bureau's package bidding procedures which 
allow bidders in Auction No. 31 to design their own packages. Our 
procedures do not currently provide a method for calculating a default 
payment when defaulted licenses are subsequently won in a package(s). 
While we would prefer to use our current rule for calculating default 
payments and not aggregate default payments or apportion payments among 
defaulting bidders, where licenses are won in different packages in a 
subsequent auction there is no choice but to do so. Thus, we set forth 
a rule for Auction No. 31 that will allow the calculation of default 
payments in those situations where the subsequent auction results in a 
completely different set of winning packages. Where, however, we are 
able to apply the current method for calculating default payments, or 
apply an analogous rule, we will do so.
    14. Accordingly, we modify Sec. 27.501 of the Commission's rules 
for calculating the deficiency portion of default payments in Auction 
No. 31 when a package bidding design is employed.
D. Additional Default Payment
    15. Because of the widespread implications of default under package 
bidding, two commenters recommend that we modify our rules to provide a 
stronger deterrent against default. One commenter recommends that we 
raise the additional payment portion of the default payment from three 
percent to 25 percent to discourage strategic defaults and avoid 
potentially inefficient auction results. The other recommends that: (i) 
Bidders be required to deposit 50 percent of their winning bids within 
eight business days after the close of the auction; (ii) each defaulter 
and the real party in interest be jointly and severally responsible for 
the entire revenue shortfall; (iii) each defaulter and its real party 
in interest be jointly and severally responsible for a default penalty 
of 25 percent of the total revenue on all licenses that are placed in 
different hands because of the default; and (iv) to the extent 
allowable, all of a bidder's lines of business and those of its real 
party in interest be subject to suspension during the time a default 
penalty remains uncollected.
    16. We agree that the effects of a default in a package bidding 
auction require a strong deterrent against insincere bidding and 
strategic default. In an auction without package bidding, a default on 
a license mostly affects only the bidders for that license; if the 
defaulting bidder had not bid, the other licenses in the auction likely 
still would have been won by the same bidders. In an auction with 
package bidding, however, a default may reasonably be expected to 
affect multiple licenses (and perhaps every license in the auction); if 
the defaulting bidder had not bid, the licenses may well have been sold 
in different packages. We believe, however, that the protections 
proposed by one commenter are too stringent. We believe that another 
commenter offers a more measured approach in recommending that the 
additional default payments of three percent be raised to 25 percent of 
the defaulted bid or the subsequent bid, whichever is smaller. We agree 
that a 25 percent additional default payment will adequately discourage 
defaults and prevent strategic skewing of our auction and we believe 
that it is not so high as to be punitive. We are also concerned that in 
this auction a lesser amount would be inadequate to deter bidders from 
insincere bidding or strategically defaulting. Finally, we believe that 
increasing the default payment is an appropriate response to this risk, 
as the very purpose of the default payment rule, inter alia, is to 
deter frivolous or

[[Page 10377]]

insincere bidding and generally protect the integrity of the auction 
process. Therefore, for Auction No. 31, bidders that default on their 
bids will be subject to an additional payment of 25 percent of the 
subsequent winning bid(s) or the defaulting bids, whichever is less.

IV. Procedural Matters and Ordering Clauses

    17. This action is taken pursuant to sections 1, 4(i), 301, 303, 
308, 309(j), and 337 of the Communications Act of 1934, as amended, 47 
U.S.C. 151, 154(i), 301, 303, 308, 309(j), and 337, and the 
Consolidated Appropriations Act, 2000, Public Law 10-113, 113 Stat. 
1501, section 213.
    18. Accordingly, it is ordered that part 27 of the Commission's 
rules is amended to modify the default payment rule for an auction of 
licenses in the 747-762 and 777-792 MHz Bands using a package bidding 
design, and that, in accordance with section 213 of the Consolidate 
Appropriations Act, 2000, Public Law 106-113, 113 Stat. 1501 (1999), 
this rule shall be effective February 15, 2001.

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

Rule Changes

    For the reasons discussed in the preamble, the Federal 
Communications Commission amends 47 CFR part 27 as follows:

PART 27--WIRELESS COMMUNICATIONS SERVICE

    1. The authority citation for part 27 is revised to read as 
follows:

    Authority: 47 U.S.C. 154, 301, 302, 303, 307, 309, 332, 336, and 
337 unless otherwise noted.

    2. Section 27.501 is amended by redesignating the undesignated text 
as paragraph (a) and adding new paragraph (b) to read as follows:


Sec. 27.501  746-764 MHz and 776-794 MHz bands subject to competitive 
bidding.

* * * * *
    (b) For auctions of licenses in the 747-762 and 777-792 MHz Bands 
using a package bidding design, the payments imposed on bidders who 
default on payments due after an auction closes or who are 
disqualified, set forth in Sec. 1.2104(g) of this chapter, shall be 
calculated as follows. The default payment consists of a deficiency 
portion and an additional payment. The additional payment shall be 25 
percent of the subsequent winning bid or the defaulted bid, whichever 
is less. In the case that either the subsequent winning bid or the 
defaulted bid is subject to bidding credits, the additional payment 
will be calculated in an analogous manner to that used in 
Sec. 1.2104(g)(2) of this chapter. The deficiency portion of the 
default payment shall be calculated as set forth in Sec. 27.501(b)(1) 
through (b)(4). In the case that any of the relevant bids are subject 
to bidding credits, the default payment will be adjusted in an 
analogous manner to that used in Sec. 1.2104(g)(1) of this chapter.
    (1) Where a defaulting bidder won licenses individually (i.e., not 
as part of a package), and in a subsequent auction the licenses are 
also won individually, we will calculate the deficiency portion as we 
do in our simultaneous multiple round auctions, and on a license-by-
license basis (i.e., the differences between the amount originally bid 
and the amount subsequently bid will not be aggregated to determine a 
net amount owed). Where a license is sold individually and not as part 
of a package, we find no reason to modify the calculation of the 
deficiency portion of the default payment.
    (2) Where a defaulting bidder won licenses in package(s), and in a 
subsequent auction the licenses are won either in the same package(s), 
or in smaller packages or as individual licenses that correlate to the 
defaulted package(s), the deficiency portion will be determined on a 
package-by-package basis, and the differences between the amount 
originally bid and the amount(s) subsequently bid will not be 
aggregated to determine a net amount owed. Thus, in this situation, we 
will calculate the deficiency portion in a manner analogous to where 
the licenses are sold individually. However, because a bid on a package 
does not imply any specific allocation of the total amount to the 
individual licenses making up that package, where the licenses are 
subsequently sold individually or as part of smaller packages, we 
believe we should aggregate the amounts received in the subsequent 
auction in order to determine any deficiency.
    (3) Where a defaulting bidder or bidders won licenses either 
individually or as part of packages, and in a subsequent auction the 
licenses are won as larger packages or different packages (not 
including the situation described in Sec. 27.501(b)(2)), the deficiency 
portion will be calculated by subtracting the aggregate amount 
originally bid for the licenses from the aggregate amount bid in the 
subsequent auction for the licenses. As stated in Sec. 27.501(b)(2), a 
bid on a package does not imply any specific allocation of the total 
amount to the licenses making up that package. We believe that in this 
situation we should aggregate the amounts bid on the various packages 
in order to calculate the deficiency portion owed.
    (4) When in the situation described in Sec. 27.501(b)(3), there are 
multiple defaulting bidders, the default payment (both the deficiency 
portion and the additional amount portion) will be allocated to the 
defaulting bidders in proportion to the amount they originally bid. For 
example, if Bidder 1 defaults on Package ABC for $200, and Bidder 2 
defaults on Package DE for $400, and in a subsequent auction the 
licenses are won in Package AB for $150 and Package CDE for $350, 
Bidder 1 would be liable for \1/3\ of the default payment and Bidder 2 
would be responsible for \2/3\. The total default payment would be 
equal to the difference between the total of the original bids ($600) 
and the total of the subsequent amounts bid ($500) plus an additional 
amount of 25 percent of the total of the subsequent amounts bid. The 
total default payment therefore would equal $100 ($600-$500) plus 25 
percent of $500 ($125), for a total default payment of $225.
[FR Doc. 01-3786 Filed 2-14-01; 8:45 am]
BILLING CODE 6712-01-U