What You Need to Know About Secondary Markets - The FCC-sponsored Garage Sale

It's like a city council proclaiming a community-wide, no-permits-required, garage sale weekend. The Federal Communications Commission (FCC) has declared the secondary spectrum marketplace open-sort of. There are caveats, but new rules changes open the door for licensees to lease spectrum to third parties and for auction non-participants to gain access. Some of these changes to accommodate leasing will also be used as a model to simplify application processing for license assignments and transfers of control. 

The Commission wants to let the market be the matchmaker uniting encumbered-but unused-spectrum and companies that have telecom services to offer-but no bandwidth on which to put them. The October-released text of a Report and Order (R&O) that was adopted last May promotes leasing of spectrum by current exclusive-use licensees. It also reduces the FCC's role as regulatory "middle man." 

Many exclusive-use licensees have spectrum that isn't earning them any money (particularly spectrum acquired in all-or-nothing auctions). Companies can bring this spectrum down from the attic and earn revenue by putting it into the hands of the young startup couple down the block. Conversely, would-be service providers and localized licensees that lack deep pockets can obtain slivers of spectrum in locations they need to build some dream houses. 

Spectrum leasing to secondary markets is a new discipline within communications law. Drafting and negotiating contracts that are beneficial to all concerned will require a thorough appreciation of both the commercial rewards to be gained and the liabilities that are inherent in these new rules. The FCC's intent is to minimize its regulatory involvement to increase the access to spectrum, to maximize the number of technologies and to broaden the diversity of firms providing services. Nonetheless, this reduced regulatory role passes some of the complexity to the private sector. Each agreement struck will be unique to the parties involved as well as to the associated spectrum and how it will be used. 

Supply and demand: Letting the dog see the rabbit
Most of the RF spectrum below 3GHz is already encumbered. Even though much of it is underutilized, it has been allocated over the years to various radio services. Nonetheless, the Communications Act charges the Commission, among other things, with fostering competition, encouraging new technologies and services to the public, and eliminating market barriers to entrepreneurs and small businesses. It also directs the Commission to improve the efficiency of spectrum use by mobile services and to reduce the regulatory burden on users. Simultaneously, the Act also specifically charges the Commission with being the gatekeeper for every construction permit and every license assignment or transfer. The FCC has dutifully sought spectrum management methods compatible with fulfilling all of these legislative mandates. These methods have included reallocation, non-exclusive use (spectrum sharing), relocation, lotteries, competitive bidding and narrowbanding. Despite all of these efforts, available spectrum for new services and existing services is still wanting. 

The FCC's latest solution in R&O form is Promoting Efficient Use of Spectrum Through Elimination of Barriers to the Development of Secondary Markets (WT 00-230; FCC 03-113). It is the result of a process that began with a Notice of Proposed Rule Making (NPRM) in November 2000, abetted by the report of the Commission's Spectrum Policy Task Force released one year ago. In tandem with this R&O, the Commission has also issued a Further Notice of Proposed Rule Making (FNPRM) to flesh out the mechanics of spectrum leasing and to explore the potential of expanding the approach to additional services. 

In November 2000, the Commission simultaneously issued a Policy Statement along with its NPRM for this secondary markets proceeding. Inherent in that Policy was the concept that: "In general, the best way to realize the maximum benefits from the spectrum is to permit and promote the operation of market forces in determining how spectrum is used. A principal tenet of this market-based approach is that in order for competition to bring consumers the highest valued services in the most efficient manner, competing users of spectrum need flexibility to respond to market forces and demands." The Commission's premise was that creating a secondary market for spectrum usage rights would help relieve spectrum shortages. This would make unused or underutilized spectrum held by existing licensees accessible to other users and services. Theoretically, this would also promote the development of new, spectrum-efficient technologies.

The original 2000 NPRM was much broader in potential scope than the current R&O. Broadcast services spectrum, for example was taken off the table to reduce the likelihood of windfalls to corporations that had been freely awarded spectrum in the public interest. Likewise, leasing will not apply to public safety, amateur, maritime or aviation spectrum. Nevertheless, exclusive-use licenses across 28 services are included in the R&O. The intended lessee beneficiaries of the new policy include:

  • current operators needing more spectrum for short- or long-term customer needs.
  • new operators wanting to serve limited areas or narrowly targeted markets.
  • small businesses that want to deliver services in rural communities.
  • entities unable or unwilling to participate in spectrum auctions or that otherwise do not have a license.
  • "innovative" operators wanting to deploy "opportunistic spectrum devices."

How leasing to the secondary market works
The R&O comprises numerous additions and revisions to Part 1 ("Practice and Procedure"; 47 C.F.R. 1) and some minor changes to Part 27 ("Miscellaneous Wireless Communications Services"; 47 C.F.R. 27) of the FCC rules. For the selected wireless services (see Table 1, below) wherein a licensee has exclusive use, the Commission has outlined two spectrum-leasing options: "spectrum manager leasing" and "de facto transfer leasing."

Spectrum Manager Leasing. This option is partially modeled on the Commission's experience with "band manager" spectrum management for the 700MHz guard band frequencies. (It is dissimilar, however, in that it does not create a new class of licensee.) Under the spectrum manager system, a licensee/lessor retains both legal (de jure) and working (de facto) control of the license, and remains the party primarily accountable to the FCC for adherence to all service, interference and operating rules. Such leases may be executed for any portion of spectrum held, over any geographic area and for any duration (within the confines of the description of the license). These agreements do not require prior Commission approval. The "spectrum manager" licensee/lessor remains responsible for all filings, as well. The lessee, however, must meet the same eligibility and qualifications tests that apply to the license holder (e.g., foreign ownership restrictions, or licenses that are associated with a designated entity or entrepreneurial preference). 

Although such leases do not require Commission approval prior to execution, they do require notification to the FCC by the spectrum manager (licensee) within two weeks of signing and within three weeks prior to the lessee operating any facilities. (If the term of the lease is one year or less, this three-week deadline is further reduced to a 10-day period.) In its notifications, the spectrum manager must reveal the identity of the lessee; the quantity, frequencies and geographic footprint of the spectrum leased; the term of the lease; and the lessee's disclosure of any other interest it holds in other spectrum (licensed and leased) in the same geographic area. All this information will be made public by the FCC in Public Notices and will be entered in the Universal Licensing System database. 

The Commission has reserved to itself the right to investigate or nullify any such executed lease after the fact. In essence, then, what the R&O accomplishes with this leasing option is a "notify and go" system, whereby the onus is on other license holders or the FCC itself to object after the fact. 

De facto transfer leasing. Under this option, there again are no restrictions on the amount, footprint or timeframe particulars of the spectrum leases. However, in this scenario, the licensee, while retaining legal control of the license, does transfer operating control to the lessee on a long- or short-term basis. These leases do require prior approval by the Commission. All responsibilities for filings and the primary accountability for service rules, interference and policy compliance devolve to the lessee. 

For long-term (longer than 360 days) leases, the "streamlining" the Commission would apply consists of immediately placing the transfer request in a Public Notice, with a 14-day period for Petitions to Deny. The Wireless Telecommunication Bureau is instructed to approve the transfer lease or to "offline" the application for specific reasons within 21 days of the Public Notice. 

Short-term transfer leases (360 days or shorter duration) are subject to the same conditions as long-term transfers, with some added flexibility provided by the Commission. Although interference-related rules still apply to the lessee, compliance with certain service rules-including certain use restrictions, designated entity and entrepreneur policies, and policies related to spectrum aggregation-will not be required of short-term lessees. Additionally, approval time for these transfer leases will shortened to 10 days and treated under the FCC's Special Temporary Authority (STA) procedures. 

The decibel is in the details
There are several points in the R&O that will require attention when lessors and lessees have their legal counsels assist with contracts and negotiations. For example, licensees are not permitted to delegate to lessees their responsibilities to the Commission for performance or build-out requirements under license authorizations. The lessee may be the entity that completes the construction under the terms of the lease agreement, but the licensee is ultimately accountable. In the case of spectrum manager or long-term de facto transfer leases, a licensee may attribute its lessee's construction to itself. However, this attribution is not allowed in the case of short-term de facto transfer leases. 

Payment of advance license-term fees remains the responsibility of the licensee in all cases. However, in any Commercial Mobile Radio Service (CMRS) where regulatory fees are paid on a per-unit basis, the licensee and the lessee will each be responsible for fees for their respective numbers of units in service. 

In the case of de facto transfer leasing, several statutory obligations pass along to the lessee. This includes any E911 requirements in the case of long-term leases. (Short-term lessees are not bound to E911 requirements to the same extent). The Commission also specifically warned licensees in the R&O that it not allow leasing activity to undermine or circumvent any existing E911 obligations. Along the same lines, short-term leases are renewable, but they cannot be an endless series. The Commission said that it intends to monitor their use closely to see that their temporary nature is not abused to circumvent obligations, policies or procedures. 

Additionally, a potential lessee must be aware that the right and authority in a lease are only as good as the standing of the license holder. If the original license is "revoked, cancelled, terminated or otherwise ceases to be in effect," the lessee (and any sub-lessees) will immediately lose access to the spectrum along with the original licensee. Lessees and sub-lessees should therefore indemnify themselves against this possibility. 

Finally, there is the question, "Just because the FCC built it, will bargainers come to the marketplace?" The secondary markets R&O has the potential to dramatically alter U.S. spectrum usage, but can that potential be realized? Some observers note the disinterest of auction winners, to date, in obtaining revenue from partial sales of licenses through partitioning or disaggregation. This begs the question of whether they will be any more willing to lease parts of those licenses for less revenue and simultaneously risk their license standings on the behavior of a lessee. Also, if a corporation holds its spectrum licenses to be corporate assets, then any major transaction involving those assets, sale or lease, may require shareholder approval. In some cases, this may require a supermajority vote. 

The definition of a license asset can also be vague. When this proceeding was initiated in November 2000, then-Commissioner Harold W. Furchtgott-Roth expressed reservations that remain largely unanswered:

"While the Commission today calls for a more active secondary spectrum market, it largely misses an opportunity to define the property, contract, and liability rights associated with a spectrum license. Absent a clear definition of the rights of its licensees, secondary markets cannot reach their full potential. … the Commission must accept as a consequence of increased regulatory uncertainty that secondary markets will not flourish. Few want to buy something that cannot be defined." 

Making newcomers good RF neighbors
Although they may not be involved as potential lessors or lessees in the secondary market, other existing license holders should not be disinterested bystanders. Nearly all commenters in this proceeding expressed general support for the basic leasing premise. However, many private wireless licensees-particularly utilities-expressed concerns that mechanisms be in place to avoid potential interference from new lessees. The Commission responded in its R&O that, "Requiring that short-term spectrum lessees meet the same technical, operational and interference-related requirements imposed on the licensee will ensure that the activities of a short-term spectrum lessee do not cause interference to other operators." 

This may demonstrate some naïveté on the FCC's part. Short-term de facto transfer lessees, by definition, will commence and terminate services more frequently than is normal licensee practice. Nevertheless, they will have privity with the FCC regarding any interference they might cause, not the original licensee. It cannot be expected that all entities that lease blocks of spectrum for short terms (e.g., a block leased for one month in one city to cover a political convention) will have the operational or technical expertise to recognize or resolve all interference they may cause. Simultaneously, any disruption to critical private radio services of spectrum-adjacent licensees may be too itinerant to pinpoint or to resolve. The lease expires and the interference vanishes as mysteriously as it began. Given the shortened Public Notice period, initiation of the lessee's service may catch existing licensees unawares. Although the Commission has streamlined the leasing and transfer processes, it has not announced any corresponding streamlining of interference-resolution processes. It therefore behooves all existing licensees adjacent to frequencies that might be leased, on their own or through their agents, to monitor secondary market leases (and additions to the ULS database) as they occur. 

Reinterpreting the license-control standards The crux of the Commission's policy and R&O is to free itself from its own restrictions in the Intermountain Microwave decision of 1963 (12 FCC 2d 559). Intermountain Microwave was an interpretation of what constitutes transfer of control of a license as restricted by the Communications Act. That decision, relied on for 40 years in a facilities-based context, defined de facto control of a license as:

  • "unfettered use" of facilities and equipment.
  • day-to-day operation and control.
  • determination and implementation of policy, including preparation and filing of applications with the FCC.
  • hiring, firing and supervision of personnel.
  • payment of financial obligations, including operating expenses.
  • receipt of monies and profits derived from the operation of the facilities.

The absence of any part of this test was previously held to be an unauthorized transfer of de facto control of the license. For the purposes of spectrum leasing only, the Commission has now elected to redefine de facto control. This has created some confusion and misinterpretation in news stories and analyses. The R&O does not remove, replace or invalidate the Intermountain Microwave decision. (The Commission emphasized this point in several places in the R&O.) Presumably, for example, any management contracts, joint marketing agreements, designated entity management agreements or auction eligibility requirements will continue to be held to the Intermountain Microwave standard. 

Disagreement on what latitude the Commission has to redefine de facto control, however, created a four-to-one vote split when this R&O was adopted. That may presage legal challenges or legislative changes-or both-in the future. In dissent, Commission Michael J. Copps strongly questioned whether the Commission was disregarding it's legislative mandate under Section 310(d) of the Communications Act [47 U.S.C. 310(d)]. That section directs: "No construction permit or station license, or any rights thereunder, shall be transferred, assigned, or disposed of in any manner, voluntarily or involuntarily, directly or indirectly, or by transfer of control of any corporation holding such permit or license, to any person except upon application to the Commission and upon finding by the Commission that the public interest, convenience, and necessity will be served thereby." 

In his dissenting statement, Copps maintained that the secondary markets R&O illegally allows licensees to transfer a significant right-the right to control the spectrum on a day-to-day basis-without applying to the Commission and without the requirement of any Commission public interest finding. Although the position of the Commission majority was that Congress did not specify day-to-day control, Copps' position is that "any rights" is implicitly inclusive of that right. Copps supports most of the policies and goals of the R&O but believes enabling language must first come from Congress. [Some observers have commented that Sec. 310, originally written in 1934, is 70 years out of date, created when regulating radio primarily meant large AM chain broadcasters. However, mobile stations and services were extant in 1934 and were even mentioned within the original section. The text of what is now Sec. 310(d) was amended and its language was strengthened in 1952, well within the era of private, non-broadcast services. Additionally, Congress has modified Sec. 310 seven times since 1952 (in 1958, 1964, 1971, 1974, 1983, 1990 and 1996) and has not elected to use any of these opportunities to change its license assignment and transfer language.] 

Notwithstanding dissention about authority, the economic and social reasoning behind this secondary markets action seems to transcend political boundaries. It is worth noting that this proceeding was not inaugurated by this Commission. That is to say, Michael K. Powell, the now-Chairman and former minority-party member, is the only holdover from the 2000 Commission that instigated this action and the policy on which it was based. That a Republican-controlled Commission is executing a policy devised by a Democrat-controlled Commission is not so strange. One view is that the need for spectrum access is so acute, and the market-based precepts involved are so clear, as to be universally accepted. 

Another view might be that this proceeding falls into the category of apolitical "regulatory-think." That is, the Commission tends to construe statutes in terms of its own policy objectives. Here, it reinterprets one of its primary responsibilities outlined in the Communications Act, as discussed above, and reverses decades of FCC findings that spectrum leasing is not in the public interest. The policy goal is for market forces to work freely-within the agency's context. For example, the R&O does distinguish within the leasing options offered whether the licensee/lessor or the lessee is primarily accountable to the Commission. Nevertheless, to ensure bureaucratic accountability, the FCC has reserved to itself the right to go after either party-or both parties-in enforcing rules infractions. In essence, therefore, the Commission could "double-dip" on fines and forfeitures. 

The process is still aborning
Numerous questions remain to fill in the details of spectrum leasing. The mechanisms for transactions need to be fleshed out and ways need to be found to further reduce paperwork. Other services that might become eligible, as well as remaining market entry barriers, need to be identified. Many such issues are raised within the FNPRM, for which the FCC will receive comments and replies until early January 2004. The FNPRM also seeks comments on which other wireless services might be enfolded into secondary markets leasing and whether these could include shared-use frequencies. 

One particular area that has not been completely nailed down is whether spectrum leasing poses any unjust enrichment of licensees that received bidding credits or other preferences in the auction process. The Commission seems indisposed at present to require repayment of credits from a licensee that becomes a lessor, as the benefit derived from leasing is not equivalent to outright sale. In addition, the FNPRM seeks to resolve whether a spectrum lessee must have the same competitive bidding eligibility as the licensee/lessor. One stipulation the Commission did make in the R&O was that if any conflict arises between the revised de facto control standard for spectrum leasing arrangements and the de facto control standard in its rules for designated entities (DE) and entrepreneurs, the latter standard will apply. For example, the prior DE rules will prevail when deciding whether a licensee remains eligible for the licenses or for other benefits such as bidding credits and installment payments. 

Streamlining for all
In addition to the "streamlined" paperwork for lease agreements, the Commission used the R&O to extend the same efficiency to outright license assignment and permanent transfers of control. This streamlining applies to all the same services that are eligible for lease agreements (see Table 1, below). The same timeframe instituted for long-term de facto transfer leasing will be applied to these transfers of control. This is a significant change in that the Commission is forbearing Section 309(b) requirements relating to 30-day notice and comment for common carrier or CMRS licenses. The 30-day period for license assignment and control transfer will now conform to the same 21-day period used for lease notices. 

Wait and see-and wait
The provisions of the secondary markets R&O will not take effect until 2004. The changes to Parts 1 and 27 to accommodate leasing will go into effect 60 days after the text of the R&O is published in the Federal Register (which has not yet occurred as of late October). The new rules to streamline outright license assignment and transfer of control will go into effect on April 5, 2004. So, when spring rolls around, it will be spectrum garage sale time. Along with unstrung tennis rackets, bladeless lawnmowers and ceramic pug dogs, bargain hunters will have the opportunity next year to pick up some RF spectrum on the second-hand market. Some of it is dusty, but most of it has never been used. 

Table 1. Services where leasing of exclusive-use licenses to secondary markets will be allowed.

Part 22

  • Paging and Radiotelephone Service
  • Rural Radiotelephone Service
  • Air-Ground Radiotelephone Service
  • Cellular Radiotelephone Service
  • Offshore Radiotelephone Service

Part 24

  • Narrowband Personal Communications Services
  • Broadband Personal Communications Service

Part 27

  • Wireless Communications Service, 698-746MHz band
  • Wireless Communications Service, 746-764MHz and 776-794MHz bands
  • Wireless Communications Service, 1,390-1,392MHz band
  • Wireless Communications Service, paired 1,392-1,395MHz and 1,432-1,435MHz bands
  • Wireless Communications Service, 1,670-1,675MHz band
  • Wireless Communications Service, 2,305-2,320MHz and 2,345-2,360MHz bands
  • Wireless Communications Service, 2,385-2,390MHz band

Part 80

  • VHF Public Coast Station service

Part 90

  • 220MHz Service (excluding public safety licensees)
  • Specialized Mobile Radio Service, 800MHz and 900MHz bands (including exclusive use SMR licensees in the General Category channels)
  • Location and Monitoring Service with regard to licenses for multilateration LMS systems
  • Paging operations
  • Business and Industrial/Land Transportation channels (This includes all B/ILT channels above 512MHz and those in the 470-512 MHz band where a licensee has achieved exclusivity, but excludes B/ILT channels in the 470-512MHz band where a licensee has not achieved exclusivity and those channels below 470 MHz.)

Part 95

  • 218-219MHz band

Part 101

  • Local Multipoint Distribution Service
  • 24GHz Service
  • 39GHz Band
  • Multiple Address Systems band
  • Local Television Transmission Service
  • Private Operational Fixed Point-to-Point Microwave Service
  • Common Carrier Fixed Point-to-Point Microwave Service