Carrier Channel: Trading Space

Posted: 7/2003

Trading Space
FCC Sanctions Secondary Market for Spectrum

In a four-to-one decision, the FCC mid-May set aside 40 years of wireless regulations and authorized a secondary market for wireless spectrum.

The concept of trading is not new to telecom. The industry supports a thriving wholesale minutes market. And, in the late 90s telecoms new guard went in search of liquid bandwidth trading. That, history shows, never gained needed support beyond a small base of utility-backed telcos and it was subsequently quashed along with the implosion of Enron and its broadband unit.

Unlike bandwidth trading, spectrum trading is viewed by the industry as a generally positive development, enabling wireless carriers to fill in coverage gaps, extend coverage and even accommodate enterprises requiring temporary uses. It also could provide needed bandwidth for wireless broadband.

The new FCC rules affect both mobile and fixed wireless services, including cellular, PCS, specialized mobile radio, local multipoint distribution service (LMDS), fixed microwave, 24 GHz and 39 GHz.

However, questions remain about how trading will work. The FCC is seeking comment on what additional steps the commission should take to make sure buyers and sellers have the information needed to transact. For example, the FCC seeks comment on the potential for market makers (intermediaries) and clearinghouses and the role of the agency in regulating them.

The FCCs inquiry is on the mark. Cantor Fitzgeralds telecom unit already has announced it plans to be an intermediary. The company was involved in bandwidth trading and maintains subsidiaries in the energy trading business.

Although the buying and selling of wholesale bandwidth continues between carriers, wireline bandwidth trading failed for a number of reasons, including lack of physical interconnection or delivery points between the trading carriers, oversupply, lack of creditworthiness of some of the market participants, and little overall support from the carrier industry, says Brent Wilkins, managing director, Cantor Fitzgerald Telecom Services LLC. Cantor Fitzgerald evaluated this market, as it does all emerging markets, and determined that it was not viable.

Wireless spectrum, on the other hand, appears to be quite different. Deliverability is not an issue since the right to use the spectrum is what is being transacted. And unlike bandwidth, there is a finite supply of spectrum. Since the initial ruling, we have already seen the market potential in the form of buyers and sellers approaching Cantor Fitzgerald regarding potential transactions.

Wilkins adds the ruling enables licensees for the first time to lease spectrum for short-term periods, in smaller geographic areas and for less bandwidth. The ruling also allows for the emergence of a spot market, and creates a variety of potential market-based combinations for trades, he says.

In order to allow spectrum trading at all, the FCC had to eighty-six a standard set in the 1963 Intermountain Microwave decision that tied spectrum ownership to control of both the license and the facilities. In its report and order, the commission has ruled the spectrum now can be leased without prior approval of the commission as long as the licensee retain both legal and working control over the spectrum. It also ruled that working control of spectrum could be transferred in lease arrangements with the consent of the commission, which now promises to turnaround such requests in three weeks.

FCC Commissioner Michael Copps, in his dissenting opinion, argues the commission does not have the right to interpret the law in this way. He writes that Section 310(d) of the Communications Act prohibits the transfer of day-to-day control unless the commission finds the public interest will be served.

The commission has broad authority to interpret the requirements of the Communications Act and the new interpretation supports more market-based regulation, Commissioner Kathleen Abernathy counters. The new standard enables parties to enter to leasing transactions that are not deemed transfers of de facto control under Section 310(d) so long as the licensee continues to exercise effective working control over the spectrum while ensuring that the lessor and the lessee comply with Commission requirements, she writes in her statement.

FCC Chairman Michael Powell and Commissioner Kevin Martin wrote in a joint statement that increasing access to spectrum furthers a number of the FCCs policy goals. Access to spectrum is critical to development of a wireless broadband platform, the statement reads. Moreover, ready access to spectrum promotes increased facilities-based competition among wireless service providers and between wireless service providers and other platforms. And facilitating the ability to lease or transfer spectrum will expand spectrum access for innovators and entrepreneurs, increasing the number and variety of wireless applications available to consumers.

Besides patching holes in coverage, some of the other possible uses of leased spectrum would be for temporary bandwidth for event-based needs, such as news coverage of the Super Bowl or the Olympics. Bandwidth also could be leased for use in off-peak hours.

Tom Wheeler, president and CEO of the cellular industry trade group CTIA, says in a press statement that permitting secondary markets for spectrum will deliver to carriers improved access to the airwaves, increasing their flexibility and bringing down their costs, which should ultimately result in lower prices for consumers. Football teams arent done after draft day. They continue to meet their changing needs through trades and late season acquisitions. Wireless carriers deserve, and will now receive, similar flexibility, he says.

Part of that flexibility, according to the Rural Telecommunications Group, an advocacy organization for rural wireless telecom providers, is enabling large license holders to relax their grip on scare spectrum resources and allow smaller, rural carriers to define and serve the rural markets of their choosing.

Allowing experienced entities to assume the regulatory burden for the spectrum they are leasing is perhaps the only way to get large license holders to consider leasing their uncultivated spectrum, said RTGs General Counsel Carri Bennet in a statement. She notes the FCCs action will allow rural carriers that are well established to work with the large, nationwide mobile carriers to come to mutually beneficial leasing agreements where the rural carrier can serve its local market and the large carrier can have better coverage in rural areas.

Similarly, she notes that leasing fixed wireless spectrum in rural areas will create an additional lease-based revenue stream for license holders.

Already, wireless companies are beginning to take advantage of the new rules, IDT Corp. announced June 10 that it has formed a spectrum-leasing unit within IDT Solutions, the marketing arm of its subsidiary Winstar Holdings LLC, which holds fixed wireless licenses covering all 50 states. For example, the company possesses more than 1750 MHz of area-wide spectrum in the New York City metro area.

As one of the biggest holders of commercially licensed spectrum in the nation, IDT will now be able to generate revenues from these assets, said Brian Finkelstein, CEO of IDT Solutions/Winstar. Our ability to lease spectrum represents an additional stream of revenue that will accelerate our move towards profitability.

IDT Solutions will launch a marketing campaign this summer to announce pricing and leasing options available to businesses.

The Rules

The FCCs order creates two different mechanisms for spectrum leasing depending on the scope of the rights and responsibilities to be assumed by the lessee.

The first option  spectrum manager leasing  enables parties to enter into spectrum leasing arrangements without obtaining prior commission approval so long as the licensee retains both de jure control (i.e., legal control) of the license and de facto control (i.e., working control) over the leased spectrum pursuant to the updated de facto control standard for leasing.

Features of this option include:

• The licensee must file a notification at least 21 days in advance of operation and provide certain relevant information with regard to each lease.
• All technical and operational rules applicable to the licensee are applicable to the spectrum lessee.
• Lessees will be required to meet foreign ownership criteria and the commissions character qualifications.
• The licensee must maintain an oversight role to ensure lessee compliance with the Communications Act and applicable commission rules, and is responsible to the commission for such compliance.
• The licensee is ultimately responsible to the commission for all spectrum-related applications and notifications.
• In enforcing spectrum-related rules, the commission will look primarily to the licensee on compliance issues, but lessees are potentially accountable as well.
• Lessees are primarily responsible for compliance with non-spectrum-related requirements relating directly to their provision of whichever service they pursue (e.g., Title II requirements in the case of lessees providing common carriage).
• Following notification of the lease, the commission retains the right to investigate and nullify a leasing arrangement to the extent it raises significant public interest concerns.

The second option  de facto transfer leasing  permits parties to enter into long-term or shortterm leasing arrangements whereby the licensee retains de jure control of the license while de facto control is transferred to the lessee for the term of the lease. De facto transfer leases under this option will require prior commission approval under a streamlined approval process. Under the de facto transfer leasing option, the order establishes different rules and procedures for long-term and short-term leases, which are defined 360 days or less.

Features of long-term leasing include:

• Prior FCC approval of the lease is required, but achieved through streamlined procedures.
• Lease applications are placed promptly on public notice, and approved within 21 days of the public notice unless offlined for more detailed review.
• All service rules and policies applicable to licensee, including all eligibility rules, are applicable to lessee.
• Spectrum lessees are directly and primarily responsible for ensuring compliance with all applicable commission policies and rules, and for submitting filings relating to leased spectrum.
• For enforcement purposes, the commission will look primarily to the spectrum lessee for compliance, and lessees will be subject to enforcement action as appropriate.
• Licensees responsibility for lessee compliance is limited to instances of actual or constructive knowledge of the lessees failure to comply or violation of the terms of the lease.

Features of short-term leasing include:

• Prior FCC approval is required, but short-term lease applications are subject to expedited approval (10 days) under the commissions Special Temporary Authority (STA) procedures.
• The respective rights and responsibilities of licensees and lessees generally are the same as under the long-term option (e.g., lessees exercise de facto control and are primarily responsible for compliance).
• All technical and operational rules apply to shortterm spectrum lessees. However, given short-term nature of these arrangements, some rules applicable to the licensee  including certain use restrictions, designated entity/entrepreneur policies, and policies related to spectrum aggregation  will not be applied to the lessee.