Subject: [NEXTEL-1] FCC's New Rules Overlook Industry Realities

From: [email-masked]
Date: Sat, 23 Aug 2003 09:51:12 -0400

FCC's New Rules Overlook Industry Realities

Aug 11, 2003

By Raul R. Rodriguez & Philip A. Bonomo

The Federal Communications Commission (FCC) recently completed the most sweeping
reform of its space station licensing process in more than two decades.  New rules
were adopted with the intent of enabling the agency to act on license applications
faster than before.

Licensing reform is certainly welcome, as no one disagrees that it takes too long
to acquire a satellite authorization. And in truth, the newly adopted rules should
help to speed up the licensing process. However, in its quest for expediency, the
FCC has overlooked satellite industry realities and unwittingly created new
regulatory uncertainties, which likely will lead investors to think twice before
backing future satellite ventures - a troubling development for an industry marked
by inherent risk and several recent high profile market failures.

The FCC's reforms are numerous and, in many respects, sensible. The central
procedural change involves the establishment of a single processing queue for
satellite applications, with applications to be reviewed in the order that they
are filed. Only applications for new satellites will form the queue, however,
because the FCC wisely decided to exempt replacement satellite applications. These
latter applications, if unopposed and requesting technically consistent
replacement satellites, will be simply "grant-stamped" and returned to the
applicant in a process similar to that used for unopposed earth station
applications. The streamlined replacement satellite procedure represents perhaps
the best example of how the FCC's reforms can be expected to benefit the industry,
as licensees seeking replacement satellites will quickly and easily receive
assurance that their existing operations can continue.

Applicants of so-called "GSO-like" systems also figure to benefit from the new
licensing rules. GSO [geostationary]-like applications (i.e., applications for
satellites using earth stations with non-omni-directional antennas) now will be
treated on a "first-come, first-served" basis. In general terms, this means that
once at the head of the processing queue, a GSO-like application will be granted
if the applicant meets the necessary qualifications and the proposed operations
will not cause harmful interference to existing licensees. The first-come,
first-serve approach is straightforward, fair, and comparable to the procedure
used in the early years of satellite licensing. In addition, the approach will
likely expedite licensing simply by avoiding the typically dilatory processing
round procedure.

Cracks In The Reforms

Unfortunately, the benefits of first-come, first-served will not extend to
"NGSO-like" systems. Unlike GSO-like systems, NGSO [nongeostationary]-like systems
may require band segmentation or other interference mitigation techniques to avoid
interference resulting from their use of earth stations with omni-directional
antennas. The FCC believes that, under a first-come, first-served approach, an
NGSO-like applicant at the head of the processing queue could request so much
spectrum that market entry by others would be precluded. To avoid that scenario,
the FCC decided that it will act on NGSO-like applications through a modified
processing round using pre-set band-splitting mechanisms based on the method used
in the 2 GHz band.

This is where the limitations of the FCC's licensing reforms begin to be felt.
Under the new rules, if there is not enough NGSO spectrum to accommodate all
qualified applicants, spectrum will be divided equally among those applicants. In
cases where there are fewer than three applicants, such applicants will receive
only one-third of the available spectrum, with the remaining spectrum to be made
available in a subsequent processing round. While the FCC's mechanistic approach
offers administrative ease and avoids the difficulties associated with evaluating
each applicant's individual spectrum needs, it fails to account for variables that
affect the satellite industry. Rigidly limiting an NGSO-like licensee to at most
one-third of available spectrum runs the risk of eliminating the possibility of
developing potential future applications that may require more spectrum, either
due to the nature of the application or in response to customer demand.

The FCC believes that market mechanisms, such as spectrum rights purchases and
spectrum-sharing arrangements, will satisfy an operator's need for spectrum.
Reliance on the marketplace is generally a wise policy, and certainly the related
elimination of the anti-trafficking rule as part of the FCC's package of licensing
reforms is good news. But the secondary market carries with it significant risk.
In the face of strict construction milestones, spectrum-acquisition negotiations
will need to be completed in short order if a licensee is to avoid losing its
license. Yet, the often drawn-out nature of complicated negotiations may preclude
timely milestone compliance. Investors reasonably will expect some form of
guarantee that a satellite venture's key asset - spectrum access - will be
available in amounts sufficient to allow that venture to go forward. A
spectrum-allocation model relying heavily on the secondary market will likely not
provide the level of certainty necessary to assuage the concerns of the financial
community already skittish about the satellite industry.

Significantly exacerbating this sense of risk and uncertainty is the FCC's new
bonding requirement. In lieu of the now-defunct financial qualification
requirement, licensees of new satellites (but not replacement satellites) must
post a multi-million-dollar bond within 30 days of license grant. If a milestone
deadline is not met, or if the license is simply surrendered, the bond becomes
payable to the U.S. Treasury. The severity of this punishment will make it
difficult for companies of any size to find investors willing to assume the risk
associated with financing a proposed satellite venture. Risk aside, securing
financing in the wake of the new bonding requirement may be unfeasible, as a
practical matter, for proponents of innovative, entrepreneurial satellite
ventures. Typically, these proponents must wait until their license is in hand
before securing capital. The 30-day window from license grant to bond posting will
be, in many cases, an inadequate amount of time to pursue financing in the capital
markets.

Another potential trouble spot involves the construction milestones themselves,
which under the new rules will apply immediately to a service link license,
regardless of whether associated feeder link or inter-satellite link spectrum has
been assigned. The prospect of different time frames for the processing of
different link requests creates real doubt over a licensee's ability to complete a
system as planned, within milestone deadlines. Simply put, it is unrealistic to
expect a licensee to proceed with procurement of a satellite system without action
on critical elements of its required authority - especially where forfeiture of a
multi-million dollar bond is the penalty for failing to do so on a timely basis.

Fallout from the new rules has already begun. PanAmSat [Nasdaq: SPOT] recently
withdrew its application for authority to launch and operate a constellation of 12
fixed satellite service (FSS) satellites in the V-band. In its letter to the FCC
requesting an application fee refund, PanAmSat indicated that it based its
decision to withdraw, in part, on the new bonding and milestone requirements,
which would subject the company "to financial, business, and regulatory risks that
did not exist when PanAmSat filed its application." The costly loss associated
with the failure to meet milestone requirements also has been cited by industry
officials as a likely reason for the recent requests for dismissal of Loral's
V-band and Hughes' V- and Ku-band applications, and the surrender of Teledesic's
Ka-band licenses.

Revamping twenty years of licensing procedures is no small task. The FCC has made
significant progress in bringing its space station licensing process up to date.
But today's satellite industry requires more than just expedited licensing. It
needs a process that accounts for the realities of the satellite industry and that
advances regulatory certainty. The FCC's new rules fail that test. Unless changed,
these rules will discourage satellite procurement and launches, thereby
diminishing the provision of advanced telecommunications services to the American
public.

Raul R. Rodriguez is a member of Leventhal Senter & Lerman in Washington, D.C.,
and Philip A. Bonomo is an associate attorney with the law firm. Rodriguez can be
reached via e-mail at [email-masked].

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