Ruling Enables Carrier to Start Again

But the reorganized NextWave might face further troubles from FCC

NextWave Telecom Inc.s victory in the District of Columbia Circuit appeals court this month forces the newly installed Federal Communications Commission to re-examine a series of regulatory blunders and legal missteps—including the summary cancellation of NextWaves licenses—that began in 1994. But as the FCC ponders its next move, the company, formerly called NextWave Personal Communications Inc., is proceeding to build a business.

The FCCs court defeat is particularly thorny because the commission reauctioned NextWaves licenses to the nations largest wireless carriers in January during the height of the court battle. Disregarding the warnings of one of its own commissioners and members of Congress that a hasty reauction would only embroil more victims, the commission accepted nearly $17 billion in bids, primarily from the industrys megacarriers.

With the licenses firmly held in its bankrupt estate awaiting reorganization, NextWave is now working to construct a nationwide network to carry so-called third-generation traffic for other carriers.

NextWave, of Hawthorne, N.Y., maintains that it is not interested in selling its licenses to other wireless companies, but it is in discussions with incumbent carriers regarding customer relationships, according to an industry source. As a "carriers carrier," NextWave would like to wholesale capacity to the very operators that bid for its licenses in January.

Company sources said a final reorganization plan will be submitted to the bankruptcy court within weeks. Long-term plans envision a voice and data network, but the company will focus initial deployment on data only in 93 of its 95 markets.

"We want to get into the market as fast as we can, and the way to do that is the data play," said Michael Wack, deputy general counsel for NextWave.

In addition to a $100 million cash deal signed with Lucent Technologies Inc. earlier this month, the company is negotiating with other major gear makers and expects to spend between $2.5 billion and $3 billion on network infrastructure in the next two to three years, according to Wack. "We have taken all the cash we have available and have commenced the build-out," he said. "We fully expect to apply billions more to build out the system."

NextWave plans to expand its work force to 350 employees within 12 months.

However, if the FCC wants to impede NextWaves progress through litigation or other means, it has several options. The commission may request an en banc rehearing in the appeals court or appeal to the U.S. Supreme Court.

In addition, if NextWaves creditors decide that flipping the licenses to the megacarriers would be more lucrative than building a business, the FCC must approve the license transfers. While such transfers have already been tacitly approved by the auction that concluded in January, they would likely be viewed differently by regulators if the sums offered were to be paid to NextWave rather than the U.S. Treasury.

If the FCC decides to further prolong this battle in court, it must be wary of the appeals courts stark reminder of "the fundamental principle that federal agencies must obey all federal laws, not just those they administer."

Tortured history

The muddle inherited by FCC chairman Michael Powell began in 1994 when the commission, under then-Chairman Reed Hundt, devised an installment payment plan to enable small businesses to bid more cash than they had on hand to obtain wireless licenses. The plan grew out of a spectrum-as-cash-cow mania in which the FCC captured the attention of congressional budgeters by drawing higher bids for wireless licenses than ever imagined. As illustrated by the dilemma facing the FCC today, money remains the predominant driver in the governments spectrum assignment policies.

In 1996, small businesses pledged three times more than previous Personal Communications Service auction winners had paid, only to discover shortly after the auction that the capital markets would not support such high spectrum values. Recognizing the problem, the commission revised its rules and created payment restructuring options that allowed auction winners to keep some licenses and return others. Some licensees agreed to restructure, and others, including NextWave, declared bankruptcy.

After winning several rounds in bankruptcy court, NextWave lost its case on appeal in the Second Circuit at the end of 1999. The company then proposed to end the court wrangling and pay its original $4.7 billion bid, with interest, plus provide free broadband access in rural markets. The commission, under former Chairman William Kennard, rejected the offer and, on Jan. 12 last year, declared for the first time that NextWaves licenses had been canceled and would be reauctioned.

The commissions battle against NextWave reveals a federal agency that frequently contradicts itself and treats similar licensees in disparate fashion. The appeals court found that not only does the bankruptcy code give licensees reason to believe licenses are shielded from cancellation but that "the Commissions own conduct suggests that it was at best unsure" whether the license cancellation was blocked by law.

Many actions the FCC took in its crusade to regain NextWaves licenses contradicted its stated policy of automatic license cancellation, insiders say. At one point, Kennards commission secretly agreed to hand NextWaves licenses over to Nextel Communications Inc., a carrier in need of spectrum, according to sources close to the board. In a backroom deal signed by the commissions general counsel in August 1999, the FCC agreed that once it reclaimed NextWaves licenses, it would assign them to Nextel for about $1.6 billion. The maneuver—which violated FCC policy—was designed to entice NextWaves creditors away from the companys reorganization plan, sources said.