Treasury Deals a Blow to FCC on Payment for Licenses

The Treasury Department has rejected a request by the Federal Communications Commission to take over the collection of $11 billion owed the FCC by companies that say they can’t pay for communications licenses won at agency auctions two years ago.

The department’s decision to forgo responsibility for the license payments is a huge setback for the FCC. The rebuff, together with an ongoing Justice Department investigation of alleged bid-rigging by some auction participants, could seriously undermine one of Washington’s hottest methods of raising money for the federal government.

Collecting license fees, said a Treasury official, is “just not our responsibility. We don’t have the resources.”

FCC Chairman Reed E. Hundt, who has been one of the Clinton administration’s biggest auction boosters but has also decried the conflicting role the FCC plays as wireless license promoter and creditor, expressed no criticism of Treasury’s decision. “We are satisfied with the help they are giving us.”

But one of Hundt’s top aides was more downbeat: “It appears unlikely that Treasury will take on any larger role. Realistically, this is our responsibility.”

The FCC must now scramble on its own to try to avert a massive default by some of the 89 bidders. The companies--including San Diego-based NextWave Telecom Inc., Pocket Communications of Washington and General Wireless--pledged a total of $11 billion for 493 licenses they received in separate auctions in 1995 and 1996. The wireless licenses are for an advanced wireless “personal communications service” that will rival existing cellular telephones.

The financial straits of the 89 bidders are unclear, experts say. But a majority of license winners indicated in an FCC hearing last month that they could come up with only 20% to 30% of the amount they pledged for their license, estimates that have surprised federal budget analysts.

In March, the FCC temporarily suspended collection of installment payments for the licenses and approached the Treasury Department to take over the collection task after several winning bidders indicated they were short of cash.

Among the troubled companies was Pocket Communications, which has sought court protection from its creditors after bidding $1.4 billion for 43 wireless licenses. Another aggressive bidder, NextWave, has recently restructured and slashed its staff by more than half to 150 people, according to an industry source, and cut back on the cities where it is deploying wireless systems.

“We had assumed a 12% loss from the auctions, but auction participants have been talking about [losses] of 70% to 80%,” said one analyst at the Congressional Budget Office, who asked not to be identified. Losses of that magnitude, the analyst said, would “create an exposure of up to $8 billion . . . and the federal taxpayer would be on the hook for it.”

Consumers, meanwhile, could face “higher prices and substantially less competition” if the cash-strapped bidders are not somehow accommodated, said Whitey Bluestein, vice president of MCI Communications Corp., which has invested in NextWave.

But many losing bidders--as well as entrenched wireless providers--are adamantly opposed to giving struggling bidders a break.

“If these licensees truthfully certified that they were financially qualified to hold PCS licenses and agreed that they would comply with their installment payment obligations if they won, why are they now claiming that they are incapable of making the installment payments?” BellSouth Corp. asked in comments filed with the FCC this week. Comparing the plight of the bidders to overextended homeowners, BellSouth said: “Any rational lender would . . . foreclose if the [bidder] does not make the required payments.”

The aggressive wireless bidding, which produced prices nearly three times higher than those offered by more well-heeled companies like AT&T; Corp. and BellSouth in earlier wireless FCC auctions, was fueled by the agency offering generous financial terms to encourage small entrepreneurial companies to compete against bigger players.

Many recent auctions have seen far lower prices. And the Justice Department, spurred by a complaint filed with the FCC in March by auction bidder High Plains Wireless, is looking into allegations that some auction participants used collusion to fend off rivals from choice licenses.

Small businesses competing in the first of the two auctions that raised $10.2 billion were only required to pay 10% when they took possession of their license. Similarly, firms bidding in the second auction a few months later that raised $642.3 million were required to put down 20% of their bid and weren’t required to pay back any principal until two years after they received their license.

Since the FCC began auctioning wireless licenses in 1994 as a way of raising money for the federal Treasury after decades of giving away communications licenses for free, bidders have defaulted on 21 licenses valued at $904.6 million. However, the FCC has reauctioned 18 of those licenses for $929 million.