WASHINGTON — Federal regulators on Thursday approved a controversial plan to aid companies unable to pay the billions of dollars they bid for government licenses to offer an advanced new wireless phone service.
In a decision that will impact President Clinton's efforts to balance future federal budgets, the Federal Communications Commission approved a plan that allows cash-strapped bidders in the so-called C-Block auction to clear their debts. Under the plan, they could resume payments to the government or select one of three other options that would involve giving back some or all of their licenses and forfeiting hundreds of millions of dollars in down payments.
But some critics say the plan offers too little too late because previous wireless auction bidders, such as AT&T Corp. and Sprint PCS, are so far ahead in building their systems that C-Block licenses are no longer worth the $10.2 billion bidders have pledged. Some experts expect that cash strapped C-Block bidders will file for bankruptcy protection, delaying the quick build out of what was once considered prime wireless real estate.
"This outcome will guarantee further delay in the deployment of PCS [personal communications services] . . . and keep bankruptcy lawyers busy for years," said Herschel Shosteck, who heads a Wheaton, Md.-based telecommunications consulting firm.
The FCC said its plan is aimed at ensuring a speedy introduction of PCS, an eagerly awaited digital wireless technology, to compete with existing cellular phone service, while averting a massive financial default by a half-dozen wireless bidders.
"The FCC was between a rock and a hard place," said Phillip Redman, a senior analyst with the Yankee Group, a Cambridge, Mass., consulting firm. "They were facing the political [wrath] of Congress as well as the threat that other bidders would sue if all the licenses were re-auctioned."
Under the plan adopted by the FCC, installment payments that were suspended by the agency last March will continue to be deferred until March 31, 1998.
After that time, the companies must restart their debt payments; return their wireless licenses and forfeit a 10% down payment; or return half of the airwaves they are licensed to use in exchange for a 50% reduction in debt. Under a fourth option, a bidder could keep as many licenses as it could afford, with 70% of the company's down payment applied toward the total amount of the full bid.
Companies have until Jan. 15 to decide which option to take. A smaller group of bidders, which participated in a separate airwaves auction in 1995 and also had their payments suspended by the FCC, will be ineligible for this repayment plan. The FCC has not decided when and under what terms it will re-auction any licenses that are returned.
From the start, the C-Block auction was among the FCC's most controversial because unlike other big license sales, the FCC offered generous financial terms to encourage small entrepreneurial companies to compete against bigger players. That decision generated bids that were nearly three times higher than well-heeled companies like BellSouth Corp. and AT&T had paid in other wireless contests.
The companies affected by the plan, which include San Diego-based NextWave Telecom Inc., General Wireless Inc., Pocket Communications, Americall, Clearcomm and Chase Telecom, hold PCS licenses that cover nearly two-thirds of the U.S. population.
Although some experts believe it is unlikely a re-auction of C-Block licenses will attract prices approaching the original bids, there is evidence that wireless spectrum remains valuable. This summer, for example, an international consortium that included BellSouth bid $2.5 billion for the right to offer PCS service in Sao Paulo, Brazil. That price amounts to about $139 for each of the city's 18 million residents, or more than three times what C-Block bidders paid to reach residents in U.S. markets.
Still, outgoing FCC Chairman Reed E. Hundt said the repayment plan could backfire by forcing some companies--particularly those seeking to keep some of their licenses--into Bankruptcy Court.
In particular, Hundt opposed the fourth payment option, calling the 30% penalty confiscatory. He said it could cost a company like NextWave as much as $150 million more over its original bid.
"The prepayment option we adopt today stands fundamentally at odds with basic principles of commercial reasonableness," Hundt said. "Our goal should be [promoting] competition, not debt collection."
At least one of the financially troubled bidders, Pocket Communications of Washington, D.C., has sought protection from its creditors after bidding $1.4 billion for 43 wireless licenses.
Jennifer Walsh, a spokeswoman for NextWave, said Thursday that the company will appeal the FCC decision. NextWave paid $4.7 billion for 43 wireless licenses, including those covering the Los Angeles area.
"We don't think this is a commercially reasonable solution, and it is unnecessarily punitive in nature," Walsh said.
Earlier this month, the Congressional Budget Office released its first official assessment of the auction's potential financial impact and concluded that the federal government could face a shortfall of more than $5.5 billion because of the diminished value of licenses and lengthy litigation.
Although the shortfall wouldn't affect this year's budget deal, it would increase the deficit in future budgets depending on when the federal government decided to account for it.