[Federal Register Volume 71, Number 114 (Wednesday, June 14, 2006)]
[Rules and Regulations]
[Pages 34272-34279]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-9275]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 1

[WT Docket No. 05-211; FCC 06-78]


Commercial Spectrum Enhancement Act and Modernization of the 
Commission's Competitive Bidding Rules and Procedures

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: The Federal Communications Commission, on its own motion, 
clarifies certain aspects of the Implementation of the Commercial 
Spectrum Enhancement Act and Modernization of the Commission's 
Competitive Bidding Rules and Procedures. Among other things, the 
Commission clarifies that the expansion of the unjust enrichment 
payment schedule to ten years applies only to licenses granted on or 
after April 25, 2006. This ensures that retroactive penalties are not 
imposed on pre-existing designated entities.

DATES: Effective June 14, 2006.

FOR FURTHER INFORMATION CONTACT: Brian Carter at (202) 418-0660.

SUPPLEMENTARY INFORMATION: This is a summary of the Order on 
Reconsideration of the Second Report and Order (Order on 
Reconsideration) released on June 2, 2006. The complete text of the 
Order on Reconsideration including attachments and related Commission 
documents is available for public inspection and copying from 8 a.m. to 
4:30 p.m. Monday through Thursday or from 8 a.m. to 11:30 a.m. on 
Friday at the FCC Reference Information Center, Portals II, 445 12th 
Street, SW., Room CY-A257, Washington, DC 20554. The Order on 
Reconsideration and related Commission documents may also be purchased 
from the Commission's duplicating contractor, Best Copy and Printing, 
Inc. (BCPI), Portals II, 445 12th Street, SW., Room CY-B402, 
Washington, DC 20554, telephone 202-488-5300, facsimile 202-488-5563, 
or you may contact BCPI at its Web site: http://www.BCPIWEB.com. When 
ordering documents from BCPI please provide the appropriate FCC 
document number, for example, FCC 06-78. The Order on Reconsideration 
and related documents are also available on the Internet at the 
Commission's Web site: http://wireless.fcc.gov/auctions.

I. Introduction

    1. The Commission, on its own motion, released an Order on 
Reconsideration which clarifies certain aspects of the Implementation 
of the Commercial Spectrum Enhancement Act and Modernization of the 
Commission's Competitive Bidding Rules and Procedures, Second Report 
and Order (Designated Entity Second Report and Order), 71 FR 26245, 
(May 4, 2006). The Commission also addresses certain procedural issues 
raised in filings submitted in response to the Designated Entity Second 
Report and Order.

II. Background

    2. In the Further Notice of Proposed Rule Making in this proceeding 
(FNPRM), 71 FR 6992 (February 10, 2006), the Commission sought comment 
on a proposal by a commenter that the Commission restrict the award of 
designated entity benefits to designated entities that have material 
relationships with large in-region incumbent wireless service 
providers. The Commission asked for comment on each of the elements of 
this proposal, including what types of material relationships should 
trigger a restriction on the availability of designated entity benefits 
and what types of entities other than large in-region incumbent 
wireless service providers should be covered.
    3. In the Designated Entity Second Report and Order, the Commission 
revised its Part 1 rules to include certain material relationships as 
factors in determining designated entity eligibility. Specifically, the 
Commission adopted rules to limit the award of designated entity 
benefits to any

[[Page 34273]]

applicant or licensee that has impermissible material relationships or 
an attributable material relationship created by certain agreements 
with one or more other entities for the lease or resale (including 
under a wholesale arrangement) of its spectrum capacity. The Commission 
found that these additional eligibility restrictions were necessary to 
meet its statutory obligations and to ensure that, in accordance with 
the intent of Congress, every recipient of the Commission's designated 
entity benefits is an entity that uses its licenses to directly provide 
facilities-based telecommunications services for the benefit of the 
public. In particular, the Commission determined that the relationships 
underpinning such leasing and resale agreements underscored the need 
for stricter regulatory parameters to ensure that benefits were 
reserved to provide opportunities for designated entities to become 
robust independent facilities-based service providers with the ability 
to provide new and innovative services to the public, and to prevent 
the unjust enrichment of unintended beneficiaries.
    4. In the FNPRM, the Commission also sought comment on whether, if 
it adopted a new restriction on the award of bidding credits to 
designated entities, the Commission should adopt revisions to its 
unjust enrichment rules. The Commission asked over what portion of the 
license term the unjust enrichment provisions should apply if it 
decided to require reimbursement by licensees that, either through a 
change of material relationships or assignment or transfer of control 
of the license, lose their eligibility for a bidding credit pursuant to 
any eligibility restriction that it might adopt. In the Designated 
Entity Second Report and Order, the Commission adopted rule 
modifications to strengthen its unjust enrichment rules in order to 
better deter entities from attempting to circumvent its designated 
entity eligibility requirements and to recapture designated entity 
benefits when ineligible entities control designated entity licenses or 
exert impermissible influence over a designated entity. Specifically, 
the Commission adopted a ten-year unjust enrichment schedule for 
licenses acquired with bidding credits.
    5. Finally, in the Designated Entity Second Report and Order, in 
order to ensure its continued ability to safeguard the award of 
designated entity benefits, the Commission explained how it will 
implement its rules concerning audits, particularly with respect to 
designated entities that win licenses in the upcoming AWS auction, and 
refined its rules with respect to the reporting obligations of 
designated entities. In the Order on Reconsideration, the Commission 
provides guidance on these implementation rules as well as on the 
substantive rules mentioned above.
    6. Several parties have submitted filings in this docket addressing 
various aspects of the Designated Entity Second Report and Order. Among 
the filing are a petition for expedited reconsideration and two 
supplements.

III. Discussion

A. Section 309(j)(3)(E)(ii)

    7. Certain parties assert that the Commission's application of the 
new designated entity rules to the licenses offered in Auction No. 66 
violates section 309(j)(3)(E)(ii) of the Communications Act, a 
directive that the Commission ensure that, after it issues bidding 
rules, interested parties have sufficient time to develop business 
plans, assess market conditions, and evaluate the availability of 
equipment for the relevant services. The Commission disagrees.
    8. The Commission rejects the basic assumption that the new 
designated entity rules implicate section 309(j)(3)(E)(ii) at all and 
concludes that while that provision instructs the Commission to promote 
the objective of ensuring that interested parties after the issuance of 
bidding rules have a sufficient time to develop business plans, assess 
market conditions, and evaluate the availability of equipment for the 
relevant services, the new designated entity rules do not constitute 
bidding rules for purposes of section 309(j)(3)(E)(ii). The Commission 
has explained that this provision does not require the Commission to 
postpone an auction until every external factor that might influence a 
bidder's business plan is resolved with absolute certainty. Rather, the 
provision applies to auction-specific information and specific 
mechanisms relating to day-to-day auction conduct. The new designated 
entity rules included neither auction-specific information nor specific 
mechanisms relating to day-to-day auction conduct. Therefore, the 
Commission concluded that it does not believe that they fall under the 
rubric of section 309(j)(3)(E)(ii).
    9. The Commission also notes that parties were on notice for many 
months of the Commission's intent to apply the changes to the 
designated entity rules adopted in the proceeding to licenses issued in 
Auction No. 66. The Commission finds that parties had ample warning 
that a change in the designated entity rules was coming and should have 
been prepared to react as soon as the new rules were announced. The 
Commission concludes that while parties complain that the then-existing 
short-form filing deadline for Auction No. 66 was two weeks after the 
release of the new designated entity rules, auction applicants are 
permitted, even after the short-form filing deadline, to take a variety 
of steps to develop business plans, assess market conditions, and 
evaluate the availability of equipment for the relevant services, 
including adding non-controlling investors at any time before or during 
the auction.
    10. The Commission notes that it has rescheduled the deadline for 
filing short-form applications to participate in Auction No. 66, and 
interested parties have until June 19, 2006, or 54 days after the 
release of the Designated Entity Second Report and Order to file their 
applications. The auction itself is scheduled to take place on August 
9, 2006. The Commission also notes that even assuming that section 
309(j)(3)(E)(ii) applies to these rules, this new schedule provides 
applicants with more than sufficient time to adjust business plans and 
reevaluate market conditions in light of the new designated entity 
rules.
    11. The Commission asserts that section 309(j)(3) requires the 
Commission to balance several statutory objectives and that the 
Commission promote several other objectives in exercising its 
competitive bidding authority, including the rapid deployment of new 
technologies and services to the public, promotion of economic 
opportunity and competition, recovery for the public of a portion of 
the value of the spectrum and avoidance of unjust enrichment, and 
efficient and intensive use of the spectrum. The Commission emphasizes 
that two of these other statutory objectives are of particular 
importance here: (1) Promoting the development and rapid deployment of 
new technologies, products, and services for the benefit of the public; 
and (2) avoiding unjust enrichment. The Commission believes that these 
objectives impose on it an obligation to avoid unnecessary or 
unreasonable delays of Auction No. 66. The Commission has evidence that 
potential bidders have an immediate need for the licenses that will be 
offered in Auction No. 66 and that delaying the auction would impair 
the rapid deployment of affordable wireless service to the public. 
Indeed, there is evidence in the record that suggests that delaying the 
auction further will impede the ability of smaller entities to 
successfully obtain licenses in Auction No. 66, even though parties 
claim that

[[Page 34274]]

the Commission's new rules will deter small businesses from 
participating in the auction. The alternative proposed by the various 
parties of holding Auction No. 66 as currently scheduled but setting 
aside the Commission's new designated entity rules with respect to the 
licenses offered in that auction, would put the Commission in the 
position of neglecting its statutory duty to avoid unjust enrichment by 
assuring that designated entity benefits go to those entities that use 
their licenses to provide facilities-based services for the benefit of 
the public. The additional alternative proposed by parties of delaying 
the auction to allow further comment on the rules adopted in the 
Designated Entity Second Report and Order would constitute unreasonable 
delay in light of its statutory obligation to promote the development 
and rapid deployment of services for the benefit of the public. For all 
of these reasons, the Commission continues to believe that it has 
reasonably balanced the objectives set forth in section 309(j)(3) and 
that proceeding with the auction as scheduled would best serve the 
public interest.

B. Material Relationships

    12. Notice. Certain parties argue that the Commission violated the 
Administrative Procedure Act by adopting the new material relationship 
rules. They contend, first, that the Commission failed to give 
sufficiently specific notice, and thus sufficient opportunity for 
comment, on the new restrictions on leasing and resale arrangements. 
Second, they argue that the Commission made certain aspects of the 
rules immediately effective without the requisite statutory notice. The 
Commission finds both claims unconvincing.
    13. An agency is not required to adopt a final rule that is 
identical to the proposed rule. In fact agencies are encouraged to 
modify proposed rules as a result of the comments they received. As 
long as parties could have anticipated that the rules ultimately 
adopted was possible, it is considered a logical outgrowth of the 
original proposal, and there is no violation of the APA's notice 
requirements.
    14. Applying these standards, it is clear that there was ample 
notice of the new material relationship rules in this case. The FNPRM 
emphasized the Commission's ongoing commitment to prevent companies 
from circumventing the objectives of the designated entity eligibility 
rules and to ensuring that its small business provisions are available 
only to bona fide small businesses. The Commission noted the concern 
raised in the record that those rules did not adequately prevent large 
corporations from structuring relationships in a manner that allows 
them to gain access to benefits reserved for small businesses. While 
the Commission tentatively proposed adoption of the parties rule, the 
Commission sought comment on whether other material relationships 
should trigger a restriction on the award of designated entity 
benefits. In the FNPRM, the Commission asked among other things whether 
limiting the prohibited material relationships to large incumbent 
wireless service providers or entities with significant interests in 
communications services would be sufficient to address any concerns 
that its designated entity program may be subject to potential abuse 
from larger corporate entities.
    15. The FNPRM made clear that the Commission was considering 
several approaches to defining a material relationship and broadly 
sought comment on the specific nature of the relationship that should 
trigger such a restriction.
    16. While parties claim that they had no notice that an arrangement 
such as lease or resale could constitute a material relationship, the 
FNPRM specifically contemplated it. The Commission noted that in its 
Secondary Markets proceeding, it had concluded that certain spectrum 
manager leases between a designated entity licensee and a non-
designated entity lessee would cause the spectrum lessee to become an 
attributable affiliate of the licensee, thus rendering the licensee 
ineligible for designated entity benefits and making such a spectrum 
lease impermissible. The Commission then sought comment on whether it 
should follow a similar approach. Commenting parties clearly understood 
that the Commission was contemplating rule changes that would extend 
beyond material relationships with incumbent wireless carriers.
    17. After reviewing the record, the Commission concluded that 
certain agreements between designated entities and others are generally 
inconsistent with Congress's legislative intent. Specifically, the 
Commission explained that where an agreement concerns the actual use of 
the designated entity's spectrum capacity, it is the agreement, as 
opposed to the party with whom it is entered into, that causes the 
relationship to be ripe for abuse and creates the potential for the 
relationship to impede a designated entity's ability to become a 
facilities-based provider, as intended by Congress. Accordingly, the 
Commission adopted rules in the Designated Entity Second Report and 
Order to limit the award of designated entity benefits to any applicant 
or licensee that has impermissible material relationships or an 
attributable material relationship created by agreements with one or 
more other entities for the lease or resale (including under a 
wholesale arrangement) of its spectrum capacity.
    18. These rules were a logical outgrowth of the questions the 
Commission asked in the FNPRM and are well within the scope of the 
inquiry initiated there. The fact that the Commission elected to adopt 
a definition of material relationship that differed from that 
specifically proposed by one of the parties does not mean that the 
Commission failed to provide notice of the rule modifications it 
ultimately adopted.
    19. The Commission disagrees with the contention by various parties 
that it made certain aspects of the rules immediately effective and 
finds that such an argument is based on a gross misreading of the rule. 
The reference to the date of the release in the new rule did not impose 
any consequences on parties immediately following the date of release. 
Rather, once the rules became effective--30 days after Federal Register 
publication--actions taken following the release might affect a party's 
status, but only if not undone in the period before the rule became 
effective. Thus, parties had the requisite period of notice to adjust 
in response to the new rule.
    20. Requests for General Clarification. After releasing the 
Designated Entity Second Report and Order, Commission staff received a 
number of questions seeking general advice regarding how the Commission 
intended to implement its rule modifications. The Commission therefore 
clarifies how it will consider: (1) The meaning of spectrum capacity in 
the context of material relationships, (2) grandfathering, and (3) 
applicability of the rules to particular services.
    21. Material Relationships. The Commission noted that a number of 
questions have been raised regarding how the Commission will evaluate 
impermissible and attributable material relationships for the purposes 
of determining eligibility for both designated entity benefits and the 
imposition of unjust enrichment. In the Designated Entity Second Report 
and Order, the Commission concluded that an applicant or licensee has 
impermissible material relationships when it has agreements with one or 
more other entities for the lease (under either spectrum manager or de 
facto transfer leasing arrangements) or resale (including under a 
wholesale arrangement) of, on a cumulative basis,

[[Page 34275]]

more than 50 percent of the spectrum capacity of any individual 
license. The Commission decided that such impermissible material 
relationships would render the applicant or licensee (i) ineligible for 
the award of future designated entity benefits, and (ii) subject to 
unjust enrichment on a license-by-license basis. The Commission further 
concluded that an applicant or licensee has an attributable material 
relationship when it has one or more agreements with any individual 
entity, including entities and individuals attributable to that entity, 
for the lease (under either spectrum manager or de facto transfer 
leasing arrangements) or resale (including under a wholesale 
arrangement) of, on a cumulative basis, more than 25 percent of the 
spectrum capacity of any individual license that is held by the 
applicant or licensee. The Commission decided that such an attributable 
material relationship would be attributed to the applicant or licensee 
for the purposes of determining the applicant's or licensee's (i) 
eligibility for future designated entity benefits, and (ii) liability 
for unjust enrichment on a license-by-license basis. As stated in the 
Designated Entity Second Report and Order, the Commission's policy is 
to assure that a designated entity preserves at least half of the 
spectrum capacity of each license for which the designated entity has 
been awarded and retained designated entity benefits in exchange for 
the provision of service as a facilities-based provider for the benefit 
of the public.
    22. Meaning of Spectrum Capacity. In the Order on Reconsideration, 
the Commission also clarifies how it will measure compliance with the 
thresholds it adopted in its definitions of material relationships. The 
restrictions it adopted regarding impermissible and attributable 
material relationships require a designated entity to assess the 
percentage of its spectrum capacity that will be leased (under either 
spectrum manager or de facto transfer leasing arrangements) or subject 
to resale (including under a wholesale arrangement). In response to 
request for clarification, the Commission provides additional guidance 
on determining the percentage of a designated entity's spectrum 
capacity involved in lease or resale agreements.
    23. The Commission observes, as an initial matter, that there are a 
number of ways spectrum capacity could be defined. It would be 
difficult for the Commission to enumerate every possible means by which 
a licensee could lease or make its spectrum capacity available to 
another party to resell. By adopting spectrum capacity as a 
measurement, the Commission sought to provide licensees with some 
flexibility to tailor their agreements to their business needs. The 
Commission is reluctant to employ only a single measure of spectrum 
capacity. Nevertheless, to assist designated entities as they evaluate 
secondary market transactions, the Commission clarifies that if they 
meet the spectrum capacity thresholds on an MHz* pops basis, the 
Commission will find them in compliance. The MHz* pops basis is 
consistent with the Commission's current method of apportioning unjust 
enrichment when licenses are partitioned and/or disaggregated and 
provides a meaningful measure here. However, while meeting the spectrum 
capacity thresholds on an MHz * pops basis is sufficient to comply with 
the Commission's rules, it is not the only means of compliance. In 
other words, any entity meeting the thresholds on an MHz* pops basis 
will be found in compliance, but entities not meeting the thresholds on 
an MHz* pops basis may also be found in compliance based on other 
factors. The MHz* pops measure is intended as a safe harbor; it is not 
meant to limit complying with the rules in other ways that the 
Commission cannot fully anticipate at this time. The Commission 
recognizes that its decision not to enumerate all other means of 
compliance necessarily leaves some uncertainty, but thinks that the 
MHz* pops safe harbor provides sufficient certainty while allowing 
licensees and the Commission flexibility to conduct a more contextual 
analysis.
    24. Grandfathering. In the Designated Entity Second Report and 
Order, the Commission explained that it would not employ its new 
restrictions to reconsider the eligibility for any designated entity 
benefits that had been awarded to licensees prior to the April 25, 
2006, release date of the decision or to determine eligibility for 
designated entity benefits in an application for a license, an 
authorization, or an assignment or transfer of control, or a spectrum 
lease that had been filed with the Commission before, and was still 
pending approval on, that date.
    25. The Commission received a number of inquiries regarding how the 
Commission will consider future agreements that were agreed upon prior 
to the release date of its decision. The Commission therefore offers 
the following explanation: Agreements entered into by a designated 
entity--and, to the extent required, approved by or pending approval by 
the Commission--no later than April 24, 2006 that concern the lease or 
resale by the designated entity of its spectrum after the release date 
of the Designated Entity Second Report and Order are grandfathered for 
the purposes of existing eligibility benefits and the imposition of 
unjust enrichment to the extent that the designated entity has no 
discretion as to the future lease or resale. The applicability of 
grandfathering to the future lease or resale of spectrum in a pre-
existing agreement depends on whether or not the provision was a ``done 
deal'' such that, prior to April 25, 2006, the decision to lease or to 
allow the resale of spectrum was no longer within the discretion of the 
designated entity.
    26. Applicability of Material Relationships Rules to Certain 
Services. The Commission notes that there has also been some question 
about the applicability of the new material relationship rules with 
regard to agreements to lease spectrum in the 700 MHz Guard Band 
Manager Service and those other services not covered by the 
Commission's secondary market leasing policies. Consequently, the 
Commission clarifies that the new material relationship rules will 
apply only to those services in which leasing are permitted under the 
Commission's secondary markets rules.

C. Unjust Enrichment

    27. Notice. Various parties argue that the Commission violated the 
Administrative Procedure Act by giving inadequate notice and 
opportunity for comment prior to adopting new unjust enrichment 
provisions. The Commission concludes that this claim is refuted by the 
plain language of the FMPRM and by the parties' own filings in response 
to it.
    28. In the FMPRM, the Commission observed that the existing rules 
require the payment of unjust enrichment when an entity that acquires 
its license with small business benefits loses its eligibility for such 
benefits or transfers a license to another entity that is not eligible 
for the same level of benefits. The Commission also noted that a 
commenter had proposed extending this reimbursement obligation to any 
licensee that acquires a license with the help of a bidding credit but 
then makes a change in its material relationships or seeks to assign or 
transfer control of the license to an entity that would result in its 
loss of eligibility for the bidding credit pursuant to any eligibility 
restriction that the Commission adopt. According to the commenter 
strengthening the unjust enrichment rules was necessary to fulfill the 
Commission's statutory obligation to

[[Page 34276]]

prevent unjust enrichment. The FMPRM sought comment both on the 
commenter's specific proposal and on whether the Commission should seek 
to strengthen the unjust enrichment rules in some other manner. The 
Commission also asked a series of questions about the scope of the 
reimbursement obligation, seeking comment on whether it should be 
triggered only where the licensee takes on new investment or also when 
it enters into any new material financial relationship or material 
operational relationship that would have rendered the licensee 
ineligible for a bidding credit. Finally, while the Commission noted 
the commenter's proposal for a five-year reimbursement obligation, the 
Commission did not tentatively propose adopting it. Instead, it asked 
over what portion of the license term should the unjust enrichment 
provisions apply.
    29. Notwithstanding the broad scope of the questions asked by the 
FMPRM, the commenter claims that parties had no notice that the 
Commission was contemplating any changes to its unjust enrichment 
rules. The FMPRM makes clear the Commission did not put itself in such 
a straitjacket, and it would have been unreasonable for any party to 
believe that the Commission had done so. Nowhere did the Commission say 
it would consider only a five-year reimbursement obligation or that it 
would artificially limit the rule changes only to relationships with 
particular entities. Indeed, the comments filed in response to the 
FMPRM demonstrate that parties did in fact understand the scope of the 
contemplated changes to the unjust enrichment rules.
    30. The changes the Commission ultimately adopted to its unjust 
enrichment rules were clearly within the scope of the revisions 
contemplated by the FMPRM or, at a minimum, a logical outgrowth of 
them. Indeed, had the Commission only revised the five-year unjust 
enrichment schedule for certain types of transactions but not for 
others, the Commission would have risked creating an illogical scheme 
that would have created an incentive for designated entities to 
prioritize certain types of transactions over others. For all of these 
reasons, the Commission rejects the parties' APA notice claim.
    31. Impact of New Rules. In the Designated Entity Second Report and 
Order, the Commission adopted changes to its unjust enrichment rules to 
ensure that designated entity benefits go to their only intended 
beneficiaries. The Commission agreed with commenters that the adoption 
of stricter unjust enrichment rules would increase the probability that 
the designated entity would develop into a competitive facilities-based 
service provider and deter speculation by those who do not intend to 
offer service to the public, or who intend to use bidding credits to 
obtain a license at a discount and later to sell it at the full market 
price for a windfall profit.
    32. The Commission therefore modified its unjust enrichment rules 
to expand the unjust enrichment payment schedule from five to ten 
years. Further, the Commission required that it be reimbursed for the 
entire bidding credit amount owed if a designated entity loses its 
eligibility for a bidding credit prior to the filing of the applicable 
construction notifications. Specifically, the Commission adopted the 
following ten-year unjust enrichment schedule for licenses acquired 
with bidding credits. For the first five years of the license term, if 
a designated entity loses its eligibility for a bidding credit for any 
reason, including but not limited to, entering into an impermissible 
material relationship or an attributable material relationship, seeking 
to assign or transfer control of a license, or entering into a de facto 
transfer lease with an entity that does not qualify for bidding 
credits, 100 percent of the bidding credit, plus interest, is owed. For 
years six and seven of the license term, 75 percent of the bidding 
credit, plus interest, is owed. For years eight and nine, 50 percent of 
the bidding credit, plus interest, is owed, and for year ten, 25 
percent of the bidding credit, plus interest, is owed. The Commission 
also imposed a requirement that the Commission must be reimbursed for 
the entire bidding credit amount owed, plus interest, if a designated 
entity loses its eligibility for a bidding credit for any reason, 
including but not limited to, entering into an impermissible material 
relationship or an attributable material relationship, seeking to 
assign or transfer control of a license, or entering into a de facto 
transfer lease with an entity that is not eligible for bidding credits 
prior to the filing of the notification informing the Commission that 
the construction requirements applicable at the end of the license term 
have been met.
    33. Various parties assert that the new provisions will eliminate 
designated entities' access to capital and financing. For several 
reasons, these claims do not justify reconsideration of the recent rule 
changes. The parties assert that designated entities access to capital 
will be eliminated by the 10-year unjust enrichment payment schedule 
because private equity and other investors frequently adhere to three 
to seven year investment horizons, with five years being an accepted 
average. Given the Commission's recent finding that access to 
Educational Broadcast Service spectrum for longer than fifteen years is 
essential to attract the capital needed to deploy facilities for 
spectrum based services, the Commission is not convinced that the 
appropriate investment horizon for designated entity status should be 
only three to seven years. Designated entity benefits are offered to 
ensure that small businesses have an opportunity to participate in the 
provision of spectrum-based services, not to ensure the short-term exit 
strategies of parties providing capital. The Commission strengthened 
its rules to ensure that those that receive such benefits were properly 
motivated to build out their spectrum and provide services for the 
benefit of the public by closing off the opportunity to sell licenses 
awarded with bidding credits for huge profits without ever having to 
provide actual facilities-based services. Predictions regarding the new 
rules' effect on venture capital alone are not a basis for 
reconsidering the rules.
    34. In the Order on Reconsideration, the Commission noted that even 
if some sources of financing and capital would no longer be available 
on the same terms as before, the adoption of new rules is not arbitrary 
and capricious, or otherwise contrary to law. The Commission must 
balance the various statutory objectives of Section 309(j), and based 
on the record in response to the FMPRM and many years of experience, 
the Commission found that the new unjust enrichment rules are necessary 
to increase the probability that designated entities will develop into 
facilities-based providers of service for the benefit of the public. It 
is neither the Commission's statutory responsibility nor its intent 
merely to provide small businesses with generalized economic 
opportunities in connection with spectrum licenses. The Commission has 
not been charged with providing entities with a path to financial 
success, but rather with an obligation to facilitate opportunities for 
small businesses to provide spectrum based services to the public. 
Therefore, it is the Commission's responsibility to create strong 
incentives for designated entities to use spectrum to provide 
facilities-based service to the public instead of holding their 
licenses and selling them for profit. The Commission concluded that it 
believes that its new rules create appropriate incentives in this 
regard while still affording designated entities the opportunity to 
achieve financial success by providing service to the public. It is 
important to

[[Page 34277]]

remember that designated entities are provided with bidding credits in 
order to enable them to obtain spectrum and then provide facilities-
based service to the public. To the extent that they do not do so, but 
instead sell their licenses to others in the marketplace at market 
prices, the Commission believes that it is reasonable that they no 
longer be allowed to enjoy the benefit of obtaining spectrum at below-
market prices.
    35. Clarification. In the Order on Reconsideration, the Commission 
clarifies its statement in the Designated Entity Second Report and 
Order that retroactive penalties will not be imposed on pre-existing 
designated entities. Specifically, the Commission clarifies that the 
newly-adopted ten-year unjust enrichment schedule applies only to 
licenses that are granted after the release of the Designated Entity 
Second Report and Order. Likewise, the requirement that the Commission 
be reimbursed for the entire bidding credit amount owed if a designated 
entity loses its eligibility for a bidding credit prior to the filing 
of the notifications informing the Commission that the construction 
requirements applicable at the end of the license term have been met 
applies only to those licenses that are granted on or after the April 
25, 2006 release date of the Designated Entity Second Report and Order. 
The Commission also makes corresponding corrections to section 1.2111 
of its rules.

D. Review of Agreements, Annual Reporting Requirements, and Audits

    36. In the Order on Reconsideration, the Commission also clarifies 
and emphasizes certain aspects of section 1.2114, its newly-adopted 
rule relating to reportable eligibility events. As the rule expressly 
states, a designated entity must seek Commission approval for all 
reportable eligibility events. In the Designated Entity Second Report 
and Order, the Commission emphasizes that section 1.2114 requires prior 
Commission approval for a reportable eligibility event. The Commission 
also clarifies that a reportable eligibility event includes any event 
that might affect a designated entity's ongoing eligibility, under 
either its material relationship or controlling interest standards, and 
it corrects new section 1.2114(a) accordingly. Although the Commission 
affirms that it has delegated authority to the Wireless 
Telecommunications Bureau (Bureau) to implement its rule changes on 
reporting, the Commission anticipates that the Bureau's procedures will 
provide the means by which parties will apply for approval of all such 
arrangements. Such approval may require modifications to the terms of 
the parties' arrangements or unjust enrichment payments based on the 
impact of such arrangements on designated entity eligibility. The 
Commission also affirms its conclusions in the Designated Entity Second 
Report and Order with regard to the implementation of its regulations 
relating to the review of long-form applications and agreements to 
determine designated entity eligibility under the controlling interest 
standard. The Commission also affirms its event-based and annual 
reporting requirements as well as its commitment to audit the 
eligibility of every designated entity that wins a license in the AWS 
auction at least once during the initial term.

E. Regulatory Flexibility Act

    37. In the Order on Reconsideration, the Commission disagrees with 
the claims of the various parties that its recently adopted rules 
violate the Regulatory Flexibility Act (RFA). Among other things, the 
parties assert that the Commission failed to provide adequate notice in 
the Initial Regulatory Flexibility Analysis (IRFA) about the scope of 
the proposed rules, their application to current designated entity 
licensees, or the ten-year unjust enrichment schedule for licenses 
acquired with bidding credits. The Commission notes as an initial 
matter that the IRFA is not subject to judicial review. Section 611 of 
the RFA expressly prohibits courts from considering claims of non-
compliance with the initial regulatory flexibility analysis requirement 
of RFA section 603. Moreover, the parties have not articulated the 
legal basis for their claim that a purported lack of notice constitutes 
an independent violation of the RFA. In any case, the Commission has 
demonstrated above that the FNPRM provided ample notice of the possible 
rules changes at issue. For the same reason, any claim about the 
sufficiency of the Final Regulatory Flexibility Analysis (FRFA) based 
on charges of inadequate notice of lack of opportunity of comment is 
also without merit.
    38. The Commission also disagrees with the claims of the various 
parties that the Commission failed to describe significant alternatives 
to the rules it adopted in order to minimize any significant economic 
impact on small entities as required by the RFA. The Final Regulatory 
Flexibility Analysis (FRFA) in the Designated Entity Second Report and 
Order referred to the substantive part of the Order, which discussed in 
great depth the impact of the rules on small businesses, alternatives 
considered, and why the Commission adopted the rules at issue. 
Reiteration of the discussion of the impact on small businesses in the 
FRFA is not required by the RFA and such reiteration would have been 
repetitive here, as analyses of alternatives related to small 
businesses infuse the decision. In adopting the Commission's rule 
modifications to better achieve Congress's plan, the Commission fully 
explained that it was finding a reasonable balance between the 
competing goals of first, providing designated entities with reasonable 
flexibility in being able to obtain needed financing from investors 
and, second, ensuring that the rules effectively prevent entities 
ineligible for designated entity benefits from circumventing the intent 
of the rules by obtaining those benefits indirectly, through their 
investments in qualified businesses. Consistent with previous changes 
the Commission has made to its designated entity rules, the rule 
modifications at issue were the result of trying to maintain this 
balance in the face of a rapidly evolving telecommunications industry, 
legislative changes, judicial decisions, and the demand of the public 
for greater access to wireless services. Consequently, the Commission 
believes that its analysis fully complied with the requirements of the 
RFA.

IV. Conclusion

    39. For all of the reasons set forth in the Order on 
Reconsideration the Commission clarifies certain aspects of the Second 
Report and Order as well as its rules for determining the eligibility 
of applicants for size-based benefits in the context of competitive 
bidding.

V. Procedural Matters

A. Paperwork Reduction Act Analysis

    40. This document does not contain proposed information 
collection(s) subject to the Paperwork Reduction Act of 1995 (PRA), 
Public Law 104-13. In addition, therefore, it does not contain any new 
or modified information collection burden for small business concerns 
with fewer than 25 employees, pursuant to the Small Business Paperwork 
Relief Act of 2002, Public Law 107-198.

B. Congressional Review Act

    41. The Commission will include a copy of the Order on 
Reconsideration of the Second Report and Order in a report it will send 
to Congress and the Government Accountability Office pursuant to the 
Congressional Review Act.

[[Page 34278]]

C. Effective Date

    42. The Order on Reconsideration of the Second Report and Order and 
the accompanying rule changes are effective upon publication in the 
Federal Register. The Commission finds there is good cause under 
section 553(d)(3) of the Administrative Procedure Act to make the 
changes it implements with this Order effective upon Federal Register 
publication, without the usual 30-day period, because these changes 
(with the possible exception of those concerning the unjust enrichment 
rules) constitute minor points of clarification of the rules adopted in 
the Designated Entity Second Report and Order, which were published in 
the Federal Register on May 4, 2006, 71 FR 26245. As to the clarifying 
changes in the Commission's unjust enrichment rules, these changes, at 
most, serve to ``grant[ ] or recognize[ ] an exemption or relieve[ ] a 
restriction'' and would therefore fall within the exception contained 
in section 553(d)(1).

D. Ordering Clause

    43. It is ordered that pursuant to the authority granted in 
sections 4(i), 5(b), 5(c)(1), 303(r), and 309(j) of the Communications 
Act of 1934, as amended, 47 U.S.C. 154(i), 155(b), 155(c)(1), 303(r), 
and 309(j), the Order on Reconsideration of the Second Report and 
Order, is hereby ADOPTED and part 1, subpart Q of the Commission's 
rules are amended as set forth in the rule changes, effective June 14, 
2006.

List of Subjects in 47 CFR Part 1

    Administrative practice and procedures, Auctions, Licensing, 
Telecommunications.

Federal Communications Commission.
Marlene H. Dortch,
Secretary.

Final Rules

0
For the reasons discussed in the preamble, the Federal Communications 
Commission amends 47 CFR part 1 as follows:

PART 1--PRACTICE AND PROCEDURE

0
For the reasons discussed in the preamble, the FCC amends part 1 of the 
Code of Federal Regulations to read as follows:
0
1. The authority citation for part 1 continues to read as follows:

    Authority: 15 U.S.C. 79 et seq.; 47 U.S.C. 151, 154(i), 154(j), 
155, 157, 225, 303(r), and 309.

0
2. Revise paragraphs (a), (b) introductory text, (d)(2)(i) introductory 
text, (d)(2)(ii) and by adding paragraph (d)(2)(iii) to Sec.  1.2111 to 
read as follows:


Sec.  1.2111  Assignment or transfer of control: unjust enrichment.

    (a) Reporting requirement. An applicant seeking approval for a 
transfer of control or assignment (otherwise permitted under the 
Commission's rules) of a license within three years of receiving a new 
license through a competitive bidding procedure must, together with its 
application for transfer of control or assignment, file with the 
Commission a statement indicating that its license was obtained through 
competitive bidding. Such applicant must also file with the Commission 
the associated contracts for sale, option agreements, management 
agreements, or other documents disclosing the local consideration that 
the applicant would receive in return for the transfer or assignment of 
its license (see Sec.  1.948). This information should include not only 
a monetary purchase price, but also any future, contingent, in-kind, or 
other consideration (e.g., management or consulting contracts either 
with or without an option to purchase; below market financing).
    (b) Unjust enrichment payment: set-aside. As specified in this 
paragraph an applicant seeking approval for a transfer of control or 
assignment (otherwise permitted under the Commission's rules) of, or 
for entry into a material relationship (see Sec. Sec.  1.2110, 1.2114) 
(otherwise permitted under the Commission's rules) involving, a license 
acquired by the applicant pursuant to a set-aside for eligible 
designated entities under Sec.  1.2110(c), or which proposes to take 
any other action relating to ownership or control that will result in 
loss of eligibility as a designated entity, must seek Commission 
approval and may be required to make an unjust enrichment payment 
(Payment) to the Commission by cashier's check or wire transfer before 
consent will be granted. The Payment will be based upon a schedule that 
will take account of the term of the license, any applicable 
construction benchmarks, and the estimated value of the set-aside 
benefit, which will be calculated as the difference between the amount 
paid by the designated entity for the license and the value of 
comparable non-set-aside license in the free market at the time of the 
auction. The Commission will establish the amount of the Payment and 
the burden will be on the applicants to disprove this amount. No 
Payment will be required if:
* * * * *
    (d) * * *
    (2) * * *
    (i) For licenses initially granted after April 25, 2006, the amount 
of payments made pursuant to paragraph (d)(1) of this section will be 
100 percent of the value of the bidding credit prior to the filing of 
the notification informing the Commission that the construction 
requirements applicable at the end of the initial license term have 
been met. If the notification informing the Commission that the 
construction requirements applicable at the end of the initial license 
term have been met, the amount of the payments will be reduced over 
time as follows:
* * * * *
    (ii) For licenses initially granted before April 25, 2006, the 
amount of payments made pursuant to paragraph (d)(1) of this section 
will be reduced over time as follows:
    (A) 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 in the case of very small businesses transferring to small 
businesses, 100 percent of the difference between the bidding credit 
received by the former and the bidding credit for which the latter is 
eligible);
    (B) A transfer in year 3 of the license term will result in a 
forfeiture of 75 percent of the value of the bidding credit;
    (C) A transfer in year 4 of the license term will result in a 
forfeiture of 50 percent of the value of the bidding credit;
    (D) A transfer in year 5 of the license term will result in a 
forfeiture of 25 percent of the value of the bidding credit; and
    (E) For a transfer in year 6 or thereafter, there will be no 
payment.
    (iii) These payments will have to be paid to the United States 
Treasury as a condition of approval of the assignment, transfer, 
ownership change, or reportable eligibility event (see Sec.  1.2114).
* * * * *
    3. Revise paragraph (a)(1) of Sec.  1.2114 to read as follows:


Sec.  1.2114  Reporting of Eligibility Event.

    (a) * * *
    (1) Any spectrum lease (as defined in Sec.  1.9003) or resale 
arrangement (including wholesale agreements) with one entity or on a 
cumulative basis that might cause a licensee to lose eligibility for 
installment payments, a set-aside license, or a bidding credit (or for 
a particular level of bidding credit) under

[[Page 34279]]

Sec.  1.2110 and applicable service-specific rules.
* * * * *
 [FR Doc. E6-9275 Filed 6-13-06; 8:45 am]
BILLING CODE 6712-01-P