Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-97-01611/USCOURTS-caDC-97-01611-0/pdf.json

Parties Involved:
Federal Communications Commission
Respondent
Nextel Communications, Inc.
Intervenor
Southern Company
Petitioner
United States of America
Respondent

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 16, 1998 Decided February 5, 1999

No. 97-1459

Fresno Mobile Radio, Inc., et al.,

Petitioners

v.

Federal Communications Commission and

United States of America,

Respondents

Nextel Communications, Inc.,

Intervenor

Consolidated with

Nos. 97-1460, 97-1536, 97-1611

On Petitions for Review of Orders of the

Federal Communications Commission

Frederick M. Joyce argued the cause for petitioners Fresno

Mobile Radio, et al., and SMR WON. With him on the briefs

were Christine McLaughlin and Robert H. Schwaniger, Jr.

Dennis C. Brown entered an appearance.

Thomas P. Steindler argued the cause for petitioner Southern Company. With him on the briefs were Carole C. Harris

and Christine M. Gill.

Roberta L. Cook, Counsel, Federal Communications Commission, argued the cause for respondents. With her on the

brief were Joel I. Klein, Assistant Attorney General, U.S.

Department of Justice, Catherine G. O'Sullivan and Marion

L. Jetton, Attorneys, Christopher J. Wright, General Counsel,

Federal Communications Commission, and John E. Ingle,

Deputy Associate General Counsel. Mark S. Popofsky, AtUSCA Case #97-1611 Document #414343 Filed: 02/05/1999 Page 1 of 13
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torney, U.S. Department of Justice, and Daniel M. Armstrong, Associate General Counsel, Federal Communications

Commission, entered appearances.

Robert S. Foosaner, Michael D. Hays and Michael Kovaka

were on the brief for intervenor Nextel Communications, Inc.

David E. Mills entered an appearance.

Before: Edwards, Chief Judge, Williams and Ginsburg,

Circuit Judges.

Opinion for the Court filed by Circuit Judge Ginsburg.

Ginsburg, Circuit Judge: Before us are petitions for review

of two Federal Communications Commission rules creating a

new class of radio spectrum licenses for bandwidth in the 800

MHz range. Petitioner Southern Company, which holds numerous licenses in that range, asserts that the rules violate a

recently-enacted statute that requires the agency to treat all

similarly situated commercial licensees comparably. Petitioners Fresno Mobile Radio, et al., and SMR WON, a trade

association of incumbent licensees in the 800 MHz range

contend that the Commission, among other things, exceeded

its statutory authority when it decided to distribute the new

licenses by auction, failed adequately to protect the interests

of small businesses in setting the rules for the auction, and

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tiary hearings. Nextel Communications, Inc., which purchased the great majority of the licenses awarded thus far

under the new rules, has intervened in support of the Commission.

We hold that the Commission failed adequately to explain

its disparate treatment of incumbent and new licensees, and

therefore grant Southern's petition for review. We reject

each of the other petitioners' arguments, however, and conclude that the agency acted within its discretion in deciding to

allocate the new licenses by auction and otherwise proceeding

as it did.

I. Background

In 1974 the Commission created the Specialized Mobile

Radio service. SMR licensees use bandwidth in the 800 MHz

and 900 MHz ranges to provide "land mobile communications

services" on a commercial basis. 47 C.F.R. s 90.7. Until

recently the vast majority of SMR licensees provided local

dispatch services for taxis, ambulances, and the like. In the

last few years, however, an increasing number of SMR licensees have begun to use their spectrum for more ambitious

purposes--in particular, the provision of cellular telephone

and data transmission services over a wide area.

At first these licensees faced a difficult regulatory environment. For example, the Commission separately licensed each

individual transmitter and small group of channels; that

made it expensive and time-consuming for a licensee that

wanted to provide cellular telephone, data transmission, or

other services to get authorization for the large number of

transmitters and channels required for those services. They

were also hampered because most of the SMR bandwidth had

already been licensed. Furthermore, the Commission's

"build out" rule, which obligated the SMR licensee to complete its facility within one year of receiving its license,

weighed particularly upon any licensee trying to build a wide

area system.

The agency began to respond to these problems in 1993.

First, it extended the time for an SMR licensee to build a

wide-area broadcasting system to as much as five years.

Next, it proposed to offer large blocks of bandwidth and

coverage of a large geographic area in a single license. See 8

F.C.C.R. 3950 p 7 (1993).

Meanwhile, in August, 1993 the Congress amended s 332 of

the Communications Act of 1934 to require the Commission to

classify all mobile radio services as either "commercial" or

"private." 47 U.S.C. s 332(c). As to certain services that

had been considered private under the prior definition but

now would be classified as commercial, the Commission was

required to promulgate "technical requirements that are comparable to the technical requirements that apply to licensees

that are providers of substantially similar [commercial] services." Pub. L. No. 103-66, s 6002(d)(3)(B), 107 Stat. 312

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(1993). To fulfill this mandate, the Commission began a new

proceeding in which it concluded that SMR licensees offering

for-profit interconnected services--i.e. those involving both

radio and landline telephone communications--are "substantially similar" to cellular telephone and Personal Communication Service (PCS) providers, and should therefore be subject

to comparable regulatory regimes.

In order to put SMR on a footing more nearly equal to

those of other licensees, the Commission then adopted a

system for the upper 200 channels of the SMR bandwidth

pursuant to which it would auction off licenses for each of 175

newly-designated "Economic Areas." Each EA license would

include a large block of spectrum for the entire geographic

area, thereby making transmitter-by-transmitter and

channel-by-channel licensing unnecessary. To help EA licensees obtain the contiguous spectrum needed to provide competitive wide-area services, the Commission also determined

that any EA licensee shall be able to force any incumbent

SMR licensee to relocate to the lower 230 channels of SMR

spectrum, provided the EA licensee gives the displaced licensee comparable facilities and spectrum, pays the expenses

associated with its relocation, and ensures it a "seamless"

transition between the old and new frequencies. The Commission also relaxed the build out rule for EA licensees:

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see must provide service to one-third of the population in its

area within three years, and to two-thirds of the population

within five years, of the award of the license. The agency

declined, however, to extend this rule to incumbent SMR

licensees. Instead, it gave them a maximum of two years to

complete construction of their systems. See Amendment of

Part 90 of the Commission's Rules, First Report and Order,

11 F.C.C.R. 1463, pp 105-114 (1995) [First Report and Order].

On reconsideration, the Commission adhered to this new

regulatory scheme for the upper 200 channels of SMR bandwidth but changed its pre-existing method for giving small

businesses an advantage in the auction process. Specifically,

the Commission rescinded its policy of allowing small businesses to pay for licenses in installments, and instead created

a system of bidding credits for which only small businesses

could qualify. See Amendment of Part 90 of the Commission's Rules, Memorandum Opinion and Order on Reconsideration, 12 F.C.C.R. 9972, pp 125-32 (1997) [Reconsideration

Order].

In June, 1997 the Commission adopted a similar set of rules

for the lower 230 channels. Again, the agency decided to

auction off new EA licenses, each of which would cover a wide

geographic area and a large block of spectrum. It did not,

however, grant EA licensees in the lower 230 channels the

right involuntarily to displace incumbents. As before, the

Commission chose to aid small businesses at the auction with

bidding credits, but this time deferred deciding whether to

stop accepting installment payments. See Amendment of

Part 90 of the Commission's Rules, Second Report and

Order, 12 F.C.C.R. 19079, pp 276-80 (1997) [Second Report

and Order].

In October, 1997, after this Court denied SMR WON's

motion for a stay, the Commission conducted an auction for

EA licenses in the upper 200 channels. Nextel purchased 475

of the 525 licenses and 33,640 of the 35,000 channels offered.

See Public Notice, 12 F.C.C.R. 20417 (1997). The Commission has not yet scheduled an auction for EA licenses in the

lower 230 channels.

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II. Analysis

Insofar as the petitioners challenge the Commission's view

of the authority delegated to it by statute, this court's review

is governed by Chevron, U.S.A., Inc. v. NRDC, 467 U.S. 837

(1984). We must first determine whether the Congress, in

the Communications Act as amended, unambiguously addressed the "precise question[s] at issue" here. 467 U.S. at

842. If it did not, then the agency's interpretation, assuming

it is reasonable, must prevail. See id. at 844. Insofar as the

petitioners attack the Commission's exercise of its statutory

authority, this court's review is limited to determining whether the agency's decisions were arbitrary and capricious within

the meaning of the Administrative Procedure Act, 5 U.S.C.

s 706(2)(A). See Arent v. Shalala, 70 F.3d 610, 616 (D.C. Cir.

1995). The agency has met this standard if it "examined the

relevant data and articulated a satisfactory explanation for its

action." Atlantic Tele-Network, Inc. v. FCC, 59 F.3d 1384,

1389 (D.C. Cir. 1995).

A."Interim Coverage Requirement" Limited to EA Licensees

The Commission allows cellular, PCS, and EA licensees to

provide service after three years to as little as one-third, and

after five years to as little as two-thirds, of the population in

the areas covered by their licenses. Southern contends that

the Commission construed the Act unreasonably and acted

arbitrarily when it refused to extend this rule to incumbent

wide-area SMR licensees such as itself, that is, those that

have "obtained extended implementation authorizations ...

and who offer real-time, two-way voice service that is interconnected with the public switched network." According to

Southern, which is "seeking authorization to construct hundreds of [additional] sites throughout its licensed geographical area," it occupies a position in the market indistinguishable from that of any wide-area licensee--offering services

over a large geographic area, competing directly with EA

licensee Nextel as well as with cellular and PCS licensees,

and using the same technology as do they. Because Southern

was licensed under the ancien regime for SMR licensees,

however, it is required to provide service to everyone in its

license area within two years of licensing. Southern challenges the Commission to reconcile this disparate treatment

with its statutory mandate to impose "comparable" requirements upon "providers of substantially similar ... services."

Pub. L. No. 103-66, s 6002(d)(3)(B), 107 Stat. 312 (1993).

Faced with this argument on reconsideration, the Commission defended its decision upon two grounds:

[1] We impose a two year build out period on [incumbent]

site licensees because, by definition, they are seeking

authority to build out and operate a particular site. EA

licensees, in contrast, will be building multiple sites

throughout their licenses' entire geographical area and

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thus require a longer build out period. [2] Moreover, the

competitive bidding process provides incentives for EA

licenses to build out quickly, and thus reduces the likelihood that a longer construction period would lead to

spectrum warehousing.

Reconsideration Order at p 81.

Neither explanation bears scrutiny. The Commission elevates form over function when it applies the first reason to an

incumbent site licensee providing radio telephone service over

a wide area; because it is licensed for a multitude of "particular site[s]," it too "will be building sites throughout ... [an]

entire geographic area and thus require a longer build out

period." Moreover, the Commission ignores a key difference

in the regulatory regimes it has imposed upon two "substantially similar ... services": An EA licensee will never have to

provide service to more than two-thirds of its market, while a

wide-area incumbent offering the same service will be required to cover its entire service area within two years.

Even if the obstacles an EA licensee faces in constructing its

system warrant giving it more time than is allowed to a

comparable SMR licensee, the Commission has not explained

why the EA licensee should have a permanent advantage over

incumbent SMR licensees--namely, not having ever to serve

the unprofitable precincts within its licensed service area.

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The Commission's second rationale proceeds from the

premise that because an incumbent SMR licensee, unlike an

EA licensee, did not have to expend a substantial sum to get

its license, the incumbent has less incentive, in order to

recoup its investment, to put its spectrum into service quickly. In the Commission's terms, the incumbent is more likely

to "warehouse" its spectrum because it received its license

free. This is a foolish notion that should not be entertained

by anyone who has had even a single undergraduate course in

economics. See Armen A. Alchian & William R. Allen, Exchange & Production 222 (3rd ed. 1983) ("[O]nce [an item] is

acquired, [its cost is] irrelevant to any future decision.");

James D. Gwartney & Richard L. Stroup, Economics 417-19

(4th ed. 1982) ("If they are to minimize costs, business

decision-makers must recognize the irrelevance of sunk

costs."); N. Gregory Mankiw, Principles of Economics 291

(1997) ("The irrelevance of sunk costs explains how real

businesses make decisions."); Paul A. Samuelson & William

D. Nordhaus, Economics 167 (16th ed. 1998) ("One of the most

important lessons of economics is that you should look at the

marginal costs and marginal benefits of decisions and ignore

past or sunk costs"). Failing that advantage, a moment's

reflection would bring one to the realization that the use to

which an asset is put is based not upon the historical price

paid for it, but upon what it will return to its owner in the

future. Would anyone be less interested in earning a return

on money he had inherited than on money he had worked for?

Of course not! Are radio licensees not as alert as inheritors?

Whether a license costs millions of dollars or nothing, that is,

absent some institutional constraint imposed upon EA licensees by the Commission, or lenders, for example--and the

agency alludes to none--a rational licensee will voluntarily

put its spectrum into service only when the additional revenue it expects to earn from doing so exceeds the additional

cost it must incur to do so. Therefore, the Commission

cannot reasonably assert that EA licensees will be any less

prone than their incumbent SMR competitors to warehouse

spectrum.

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age Requirement to wide-area SMR licensees, we hold that

its decision was arbitrary and capricious in that respect. See

Atlantic Tele-Network, Inc., 59 F.3d at 1389. We shall not

go on, however, to address the question whether the agency's

interpretation of the statute to allow such a distinction is

permissible under Chevron: The Commission did not think

seriously about the question whether wide-area incumbent

SMR licensees are in fact sufficiently different from EA,

cellular, and PCS licensees that disparate regulatory treatment is warranted under s 6002(d)(3)(B). We are therefore

reluctant to render what may be an uninformed application of

the statute to the facts about these various services. Accordingly, we shall remand this matter for the agency to reconsider in the first instance. In the interim, the Commission shall

not deny Southern the benefit of the Interim Coverage

Requirement.

B.Authority to Auction EA Licenses

Fresno and SMR WON (hereinafter collectively referred to

as "Fresno") question the Commission's authority under

s 309(j)(1) to auction EA licenses in the upper 200 channels.

That section provides that if "mutually exclusive applications

are accepted for any initial license ... then ... the Commission shall grant the license ... through a system of competitive bidding." 47 U.S.C. s 309(j)(1). Fresno maintains that

the "common sense" meaning of an "initial license" is a

license for a new radio service, for an existing service in a

newly served area, or for previously unused spectrum. It

points out that many of the auctioned channels were already

licensed to SMR providers, and that at least some of those

incumbent licensees offer the same interconnected services as

will the EA licensee that prevailed in the auction. At least to

that extent, according to Fresno, no new service is being

licensed, hence, no "initial" license is involved. In response,

the Commission contends the EA licenses it auctioned off are

indeed "initial" because they are "first-time licenses for [EA]

systems and not renewals or modifications of existing licenses."

The statute does not unambiguously resolve "the precise

question at issue" here, Chevron, 467 U.S. at 842--whether

the Commission's creation of a new "licensing scheme" gives

it the authority to grant by auction a license for spectrum

currently being used by a licensee to provide substantially the

same (in this case, interconnected) service. To be "initial" in

any meaningful sense, a newly issued license must differ in

some significant way from the license it displaces; upon that

the parties agree. According to Fresno, the difference must

be that the new license covers a new service or territory or is

for previously unused spectrum. Although a plausible interpretation of the term, this is not the only plausible one: As

the Commission suggests, nothing in the text of the statute

forecloses it from considering a license "initial" if it is the first

awarded for a particular frequency under a new licensing

scheme, that is, one involving a different set of rights and

obligations for the licensee. Even if such a license authorizes

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no new service and covers spectrum already in use, it is the

first license for that spectrum issued under the new regulatory regime. Because the critical term of the statute is therefore ambiguous, we turn to Chevron step two and the question whether the Commission's resolution of that ambiguity is

reasonable.

Fresno contends that the Commission's interpretation of

"initial license" is unreasonable, because it removes all limitations upon the agency's authority to allocate licenses by

auction. That, however, is simply not true: The Commission

acknowledges that it must have instituted a new regulatory

regime for a new license to be deemed "initial" and thus

subject to competitive bidding. Here the Commission has, as

it says, "revis[ed] its frequency allocations and its licensing

scheme." Fresno insists that the Commission has not created

a genuinely new regulatory scheme, but that is incorrect, too.

As noted above, EA licenses cover blocks of spectrum and

substantial geographic areas, while the previously issued

SMR licenses are for small groups of channels and individual

transmitters. Unlike incumbents, moreover, EA licensees

enjoy both the liberalized build out rule and the power

involuntarily to relocate other licensees. True it is, as Fresno

points out, that the Commission experimented with some of

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these changes in the early 1990s by waiving its prior rules in

particular SMR license proceedings. See, e.g., FleetCall, 6

F.C.C.R. 1533, p 21 (1991) (waiving build-out rule). That may

show that the development of the Commission's thinking was

evolutionary rather than revolutionary; it does not, however,

mean that the EA licensing regime is merely old wine in a

new vessel. In sum, because an EA license is substantially

different from an SMR license, the agency did not act unreasonably in treating EA licenses as "initial license[s]" within

the meaning of s 309(j)(1).

C.Elimination of Installment Payment Plans

Fresno next challenges the Commission's decision to stop

letting small businesses pay by installment for licenses in the

upper 200 channels purchased at auction. Fresno contends

that the prior practice is required by s 309(j)(3)(B), which

says that, in designing an auction, the agency should seek to

disseminate licenses "among a wide variety of applicants,

including small businesses." Fresno characterizes the agency's substitute policy of providing bidding credits for small

businesses as a "token gesture," the insignificance of which it

says is demonstrated by Nextel having bought the great

majority of the licenses offered.

There are two problems with Fresno's position. First,

s 309(j)(3)(B) requires the agency to consider a variety of

objectives--not only the promotion of small businesses but

also, among others, "the development and rapid deployment

of new technologies, products, and services," "the avoidance

of unjust enrichment," and the "efficient and intensive use of

the electromagnetic spectrum." 47 U.S.C. s 309(j)(3). When

an agency must balance a number of potentially conflicting

objectives, which these are, judicial review is limited to

determining whether the agency's decision reasonably advances at least one of those objectives and its decisionmaking

process was regular. See Melcher v. FCC, 134 F.3d 1143,

1154 (D.C. Cir. 1998). Here, the record demonstrates, the

Commission decided to eliminate the installment payment

plan after thoroughly considering the competing statutory

objectives. Having recently encountered severe problems

created by licensees defaulting on their installment payments,

the Commission reasonably decided to reevaluate its payment

policy. Because that would take some time, and because

several years had already passed since the agency had accepted any new applications for 800 MHz SMR licenses, it concluded that a system of bidding credits would strike the best

balance between solicitude for small businesses and prompt

and effective use of the spectrum. See Reconsideration Order at pp 130-32. Its decision, therefore, clearly meets the

Melcher standard.

Second, the Commission did not simply sacrifice the goal of

promoting small businesses in favor of other statutory objectives; rather, it chose one method of achieving that goal over

another. While it is true, as Fresno emphasizes, that the

method chosen did not turn out to be successful at allocating

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licenses "among a wide variety of applicants," an agency's

predictive judgment regarding a matter within its sphere of

expertise is entitled to "particularly deferential" review.

Milk Indus. Found. v. Glickman, 132 F.3d 1467, 1478 (D.C.

Cir. 1998). Fresno makes no showing that the Commission's

decision was unreasonable ex ante; rather, its argument is

that the Commission's belief in the efficacy of bidding credits

appears ex post to have been mistaken. Because this argument is not a challenge to the reasonableness of the agency's

decision on the basis of the record then before it, Fresno's

claim must fail.*

D."Modification" of Incumbent Licensee Rights

Finally, Fresno contends that the licenses of incumbent

SMR providers in the upper 200 channels will be "modified"

to the extent they are forced to relocate to the lower 230

channels, and that s 316 of the Act therefore required the

__________

* Fresno also contends that the agency failed to consider the

interests of businesses owned by women and members of minority

groups, as is also required by s 309(j)(3)(B). Because Fresno

makes no showing, however, that any of its members is owned by a

woman or a member of a minority group, it lacks standing to raise

this argument. See Lujan v. Defenders of Wildlife, 504 U.S. 555,

560-61 and n.1 (1992) (to have standing, plaintiff must have suffered

a "particularized" injury, meaning that "the injury must affect the

plaintiff in a personal and individual way").

agency to grant each incumbent an evidentiary hearing before

awarding a mutually exclusive EA license. See 47 U.S.C.

s 316(a)(1) (no "order of modification shall become final until

the holder of the license ... [has been] given reasonable

opportunity ... to protest"). We do not address the merits

of this argument, however, because Fresno failed to raise it

before the Commission. See 47 U.S.C. s 405(a) ("filing of a

petition for reconsideration [is] ... a condition precedent to

judicial review ... where the party seeking such review ...

relies on questions of fact or law upon which the Commission

... has been afforded no opportunity to pass"). A number of

parties did complain to the Commission that the agency's

proposed EA licensing rules were, for a variety of reasons,

unfair to incumbents, but none of their objections mentioned

s 316 even in passing, nor did any party request an evidentiary hearing. Hence, we cannot say that the Commission was

given a reasonable "opportunity to pass" upon the argument

Fresno now makes. See Bartholdi Cable Co. v. FCC, 114

F.3d 274, 279 (D.C. Cir. 1997).

III. Summary and Conclusion

First, the Commission failed reasonably to explain its decision to apply different build out requirements to EA licensees

and to incumbent wide-area SMR licensees, such as Southern,

which provide substantially similar services. Accordingly, the

Interim Coverage Requirement for EA licensees must be

remanded to the agency for further consideration in conformiUSCA Case #97-1611 Document #414343 Filed: 02/05/1999 Page 12 of 13
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ty with Public Law 103-66.

Second, the Commission reasonably concluded that it had

the statutory authority to grant EA licenses by competitive

bidding and that the auction rules it chose would advance the

interests of small business bidders. We do not consider

Fresno's claim to an evidentiary hearing under s 316 because

it was not raised before the agency. We have considered and

rejected the petitioners' other arguments, which do not merit

treatment in a published opinion.

Judgment Accordingly.

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