Clear as Mud
After waiting two years for the Federal Communications Commission to act, public-safety officials finally got their wish as a unanimous FCC last month approved an 800 MHz order hailed universally as a better deal for first responders than even the Consensus Plan. But the much-anticipated action failed to provide certainty, as myriad questions must be answered before the proposed interference-abating rebanding project can begin.
Playing the waiting game won’t be easy for public-safety officials, who first forged a deal with Nextel Communications to reband 800 MHz users to mitigate interference nearly three years ago. However, they can take some solace in the fact that the FCC plan appears to be worth the wait.
Under the order, public safety will not have to pay any costs associated with rebanding, even if these expenses exceed the $3.2 billion Nextel must commit to the plan. In addition, public safety would receive 4.5 MHz of additional 800 MHz spectrum and 4 MHz of 700 MHz spectrum in the deal.
“All our major concerns were addressed,” said Harlin McEwen, chairman of the communications and technology committee of the International Association of Chiefs of Police. “It calls for rebanding, it gives us extra spectrum, and the money’s there to pay for rebanding.”
Association of Public-Safety Communications Officials President Vincent Stile echoed this sentiment. “The decision was great for public safety — it’s more than what was in the Consensus Plan,” Stile said.
Under the FCC’s order, rebanding payment decisions would be supervised by an independent “transition administrator.” The plan also calls for Nextel to reband in the 20 markets with the greatest interference problems within 18 months after the order is finalized and complete the nationwide project 36 months after the plan is finalized.
But that clock hasn’t started ticking yet and may be irrelevant, depending on the decisions of key parties — beginning with Nextel, which first must agree to foot the bill for rebanding.
FCC Chairman Michael Powell said during last month’s commission meeting that “the question now shifts to Nextel” while acknowledging the commission’s unanimous order is subject to legal challenges.
“Yes, we admit, there are risks in the action we take today,” Powell said. “But they seem to me to pale in comparison to the risks that our first responders face each and every day.
“An enormous amount of time and commitment has been spent on valuations; the nickel and diming of what things are worth. But you cannot put a dollar value on the life of the men and women who wear the shield.”
As of press time, Nextel offered no indication of its plans, stating only that it would not comment on the matter until it could review the details of the published order, which had not been released.
Before the FCC announced its decision, Nextel’s primary goal was to get 10 MHz of spectrum in the 1.9 GHz band, something that was included in the order along with most structural aspects of the latest version of the Consensus Plan that the carrier had promised to accept immediately upon commission passage.
But the FCC order did not mirror the Consensus Plan entirely, and the differences are notable to Nextel’s bottom line. Not only is the $3.2 billion minimum cash payment almost four times the $850 million Nextel had agreed to pay for rebanding, the amount is not capped — the wireless carrier would be required to pay more if rebanding expenses exceed $3.2 billion.
Whether that’s a significant risk is unclear. FCC commissioners made it clear that its intent was to prevent public-safety entities from having to pay any rebanding costs — including consultant expenses, Stile said — but Nextel’s financial exposure cannot be discerned until the final order is released. Even then, estimates may not reflect reality, according to Charles Werner, deputy fire chief in Charlottesville, Va.
“People have said things in filings, but I don’t think anybody has the scientific number on how much this is going to cost,” Werner said.
Regardless of the actual cost of rebanding, the FCC plan would require Nextel to pay at least $3.2 billion in cash. If rebanding costs $3.2 billion or more, that’s the amount Nextel would pay. If rebanding costs less than $3.2 billion, Nextel would cut a check for the difference to the U.S. Treasury in an “anti-windfall” payment when rebanding is completed.
FCC Wireless Telecommunications Bureau Chief John Muleta said the $3.2 billion minimum payment reflects the commission’s $4.8 billion valuation of the 1.9 GHz airwaves minus the approximately $1.6 billion value given to Nextel’s 700 MHz and 800 MHz spectrum contributions. While the 1.9 GHz valuation was close to the $5 billion minimum pricetag Verizon Wireless had placed on the airwaves, the FCC’s valuation of the spectrum Nextel would contribute under the plan was $1.34 billion less than Nextel had estimated.
The cash payout called for by the FCC “was more than Nextel was expecting,” McEwen said. Although most observers believed Nextel would have to pay more than the $850 million it committed to pay for rebanding, $3.2 billion was at least 50% more than the wireless carrier indicated to Wall Street it would have to pay.
Some observers expressed hope that Nextel’s mid-July announcement it had negotiated a $4 billion credit facility indicated the company was planning to finance the rebanding effort, but Nextel spokesman Tim O’Regan said that was not necessarily the case.
“My understanding is that was a regularly scheduled financing vehicle,” O’Regan said. “I would not draw any correlation between that and the 800 MHz situation.”
Despite this, expect Nextel to accept the deal if the published order does not reveal any negative surprises, Precursor wireless strategist Rudy Baca said. Nextel may have to pay more than it wanted for contiguous spectrum at 800 MHz and 1.9 GHz, but not agreeing to the FCC order after getting the 1.9 GHz spectrum it coveted could be a political and public-relations nightmare.
More important, walking away from the deal would leave Nextel with no clear way to get the spectrum it needs to offer the advanced services most believe are a necessity for any wireless carrier to survive during the next few years.
“If [Nextel refused the deal], they’d be pounded by the market,” Baca said.
Guzman & Co. telecom analyst Patrick Comack agreed and noted that the proposed timing of the $3.2 billion payment is critical to the company. Most of the money will be paid as rebanding is done, with the “anti-windfall” payment being due more than three years from now, when Nextel should have generated new revenue sources from its advanced-services offering.
“They will say yes,” Comack said. “They’re going to say, ‘OK, you want us to cut you a check for $700 million to $1 billion three years from now? Sure, we’ll take that deal. Heck, three years from now, we could be king of the hill; we could be Verizon.’
“That’s why Verizon is afraid. If Nextel gets this [contiguous spectrum at 800 MHz and 1.9 GHz], they’re going to be in the heavyweight division, not in the middleweight division like they are now.”
But getting Nextel’s blessing on the FCC order might not be enough to guarantee the rebanding order would be executed, because the FCC’s order also must pass legal muster on several levels. The first — and arguably the most important — of these is a review that is scheduled to be conducted by the Government Accountability Office (GAO) at the request of Sen. Frank Lautenberg, D-N.J.
Lautenberg’s request reflects the assertions made in an early July filing by William Barr, a former U.S. Attorney General who is general counsel for Verizon Communications — parent company to Nextel rival Verizon Wireless.
Barr argued that any money Nextel contributes as part of an 800 MHz rebanding order with the expectation of receiving replacement spectrum should go into the U.S. Treasury and can only be directed by Congress. Even if Nextel makes payments to cover rebanding costs, Barr asserted the clear intent is for the FCC to oversee disbursement of those funds — something that Barr contends only Congress has authority to do.
It’s a legitimate argument, according to several legal analysts. Having a federal agency like the FCC assume the primary legislative function — disbursement of funds from the sale of a public resource such as spectrum — could create a potentially dangerous long-term precedent for Congress. So concerned is Rep. Jim Nussle, R-Iowa, that he recently sponsored a bill to reaffirm the intent of laws that declare spectrum should be auctioned and that proceeds should go to the U.S. Treasury and appropriated by Congress.
That bill is not expected to be enacted, but the FCC acknowledged the GAO investigation by stating it is prepared to alter parts of the order if directed to do so by the Controller General — a move Baca characterized as “acknowledging reality.”
In fact, the specter of the GAO blocking the order was onerous enough that some sources and published reports indicated the FCC considered passing an order that would have required Nextel to make no cash payment directly attributable to the 1.9 GHz spectrum award. By doing so, the commission could have argued that the order was an FCC-authorized spectrum swap and not a spectrum sale with proceeds that should go through Congress.
Instead, the FCC decided to place the $4.8 billion valuation on the 1.9 GHz spectrum — something that was needed to get the unanimous vote desired on the matter, according to sources. However, the strategy could put the order in legal jeopardy.
“Powell said he was tired of people nickel-and-diming this, but that’s exactly what they did — they put a price on [the 1.9 GHz spectrum],” Comack said. “And by doing that, you know what? It’s not a swap, it’s a sale. I’m not a lawyer, but I think any judge will see that.”
To accomplish rebanding with no legal questions, the FCC would need to auction the 1.9 GHz spectrum with Congress earmarking the proceeds to fund the rebanding process.
“Eventually, I think someone is going to point out to Congress that, ‘You, Congress, have got to bite the bullet in terms of funding public safety,’” Baca said.
But blocking the FCC order via a GAO ruling or federal legislation may not be something Congress wants to see happen because it could mean legislators would then have to wrestle with rebanding, the extremely volatile matter that Powell called “the most difficult, complex and challenging issue” of his seven-year FCC tenure.
Legal questions aside, the FCC order promises to resolve 800 MHz interference in a manner that pleases public safety at no expense to taxpayers while clearing broadcasters from the 1.9 GHz band, spectrum that can be auctioned. And even Nextel’s opponents privately acknowledged that the FCC valuation of the 1.9 GHz spectrum is more than fair, especially in light of a private auction of airwaves in the same band that garnered minimal bids the same day as the FCC issued its 800 MHz order.
Could Congress do better? It’s doubtful, according to Baca. Even if lawmakers agreed to dedicate funds to pay for rebanding, there’s no guarantee that an auction would attract bids of more than $4.8 billion. In addition, it would be very difficult to strike a deal that would result in public safety getting the 8.5 MHz of spectrum at 700 MHz and 800 MHz that is included in the FCC order, Baca said.
As a result, public-safety officials hope the GAO and Congress dismiss the legal questions and let the FCC’s order stand.
“From public safety’s standpoint, we would like to see the GAO pull itself out of this. Let this go through and let Congress pass a law to make sure this doesn’t set a precedent,” Werner said. “I think that would eliminate the single largest hurdle.”
While the GAO may be the greatest barrier, it probably will not be the last. Still looming are ever-present legal threats from 800 MHz operators being relocated and from Nextel rivals such as Verizon Wireless.
Most analysts believed the greatest legal threat among 800 MHz users has been from iDEN carrier Southern LINC, which repeatedly filed objections to the rebanding terms throughout the proceeding. However, just days before the item was placed on the agenda, Nextel submitted an FCC filing that it had reached a “tentative agreement” with Southern to apparently diffuse the legal risk.
The same cannot be said of Verizon Wireless, which has been the most outspoken critic of the proposal to award spectrum to Nextel outside of an auction. After the FCC announced its decision, Verizon Wireless distributed a press release that described the order as “bizarre” and “not a lawful solution” while calling on Congress to “fix this mess.”
Despite these statements, Verizon Wireless did not commit to challenging the 800 MHz order in court.
“Until we see the order, we’re keeping all our options open,” spokesman Jeffrey Nelson said.
The fate of Verizon litigation may well rest with whether the telecom giant has standing to bring a case, something that may be difficult to establish because Verizon is not directly impacted by the rebanding order. Meanwhile, Nextel stated in FCC filings that it would assume the legal risk of a challenge to a 1.9 GHz award if the Consensus Plan was adopted, but O’Regan declined to comment when asked whether the same pledge would apply to the FCC’s order.
A few have argued throughout the proceeding that Verizon might forego the political heat that could accompany a legal challenge of the order. However, one aspect of Barr’s filing stated commissioners could face criminal charges as individuals for awarding spectrum. Although widely criticized as being unrealistic, Baca said it’s an indication that Verizon is serious about legally challenging the award.
“Given that they pulled the howitzer of lobbying and threatened the commission with criminal charges, I think they’re going to carry this one through to the end,” Baca said. “It’s a matter of principle and competitive advantage.”
Exactly what happens if the order is blocked by one of these challenges is unclear. McEwen said he believes “it puts us back to Square 1,” a sentiment echoed by several other public-safety officials. However, recall that the FCC has indicated it will give itself the flexibility necessary to adjust the order if directed to do so by the GAO.
In addition, an FCC wireless bureau official told Mobile Radio Technology he “assumes” the commission will execute the portion of the order that requires “enhanced best practices” be used to mitigate interference problems at 800 MHz. While the details of these “best practices” will not be known until the order is published, the official said they will establish a stricter definition of interference in the band and who is at fault, and will require the party at fault to pay to address the issue.
“If you cause the interference, you’re going to have to fix and pay for it,” the official said.
But public-safety officials are skeptical about this notion, noting that the FCC has told them for years that it lacked the legal standing to take such a stance against Nextel. More important, they remain convinced rebanding is the only permanent solution to the interference problem, which needs to be resolved promptly.
“If anyone is going to step up to block this, they should be very well prepared to fix the problem quickly,” Werner said. “It can’t be some lengthy discussion or legislative process.”
Stile agreed, noting time is not on the side of public-safety officers and the citizens they protect.
“We need to get started [on rebanding],” Stile said. “We’ve been lucky so far that no one has been killed. We’re on borrowed time here.”
Decisions, Decisions
The players whose choices will guide outcome
Nextel CEO Tim Donahue
Supporting the FCC order means paying more cash than it told the market it would have to pay Walking away from the order could be a public-relations nightmare and leave the carrier with no clear path to offer advanced services.
Sen. Frank Lautenberg
The FCC order is not the giveaway Senate members feared, but effectively allowing a federal agency to direct funds without Congressional approval is a potentially dangerous precedent. Wants GAO to investigate.
Rep. Jim Nussle
It’s questionable whether his last-minute legislation to block the FCC order can garner enough votes to be passed. The precedent question is a thorny issue, but nixing the order would mean upsetting the public-safety community.
Verizon CEO Ivan Seidenberg
The odds are still good that this will land in court, although a last-minute agreement between Nextel and Southern should greatly ease the legal concerns regarding the actual rebanding. The potential Verizon Wireless challenge regarding 1.9 GHz remains.
LAST-MINUTE LOBBYING
As the FCC neared its decision on an order to mitigate 800 MHz interference, twists were introduced on a daily basis. Here’s a recap:
JUNE 24
Published reports state FCC Chairman Michael Powell supports awarding Nextel the spectrum it wants at 1.9 GHz.
JUNE 25-27
Three-day weekend — government offices close on June 25 as a tribute to late President Ronald Reagan.
JUNE 28
Verizon Communications’ general counsel William Barr sends a letter to the FCC that states only Congress can direct funds Nextel Communications would contribute under a rebanding plan and that commissioners would risk criminal prosecution by voting for such an order.
JUNE 29
Sen. Frank Lautenberg (D-N.J.) asks the GAO to investigate the legality of the FCC’s rebanding proposal.
JUNE 30
In an FCC filing, Nextel indicates it has reach a “tentative agreement” with Southern Communications Services, which many believed to be a significant legal threat to rebanding.
JULY 1
FCC places 800 MHz item on the agenda, bringing an end to outside lobbying on the subject.
JULY 8
After lengthy internal negotiations cause the FCC to be delayed, commissioners pass the 800 MHz order. Powell says the proceeding featured “some of the most ruthless lobbying I have ever encountered.”
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