U.S. Satellite Licensing – Dawn of a New Era?

By Maury Mechanick

On May 19, the satellite industry’s wait ended, with the issuance (26 days after having been announced) of the Federal Communications Commission’s order revamping its satellite licensing process. That decision – totaling nearly 150 pages and 779 footnotes – resulted in a major overhaul of the U.S. satellite licensing regime that had been in place for two decades.

This is the first of two articles dealing with that decision. It reviews the rationale for the change, its primary features and likely impact on U.S.-licensed satellites. The second article will focus on the decision’s impact on foreign-licensed satellites.

The U.S. satellite licensing regime clearly had been broken for some time. The key question was whether any repair was possible or whether the alternatives would only make a bad situation worse.

The prior regime relied on processing rounds and off-line negotiations among applicants (sometimes called negotiated rulemakings) to resolve otherwise mutually exclusive licensing situations. Also, when license requests were submitted, the orbital locations that would be assigned were frequently unknown, a result of the FCC’s fungibility policy designed to facilitate action on multiple applications simultaneously.

This approach resulted in significant delays (two-to-three years or longer) in the issuance of licenses, particularly in new frequency bands, which was further exacerbated when off-line negotiations afforded less serious participants undue leverage. These delays resulted in economic distortion by impeding satellite companies from executing their business plans and left spectrum fallow for inordinate periods of time. Such delays also had ripple effects throughout the industry by affecting satellite manufacturers, launch vehicle providers and ground segment equipment vendors.

When the FCC issued its notice of proposed rulemaking in February 2002, the centerpiece – the proposed adoption of a first come, first served approach – was viewed by many as heresy if not outright lunacy. (While the FCC alternatively proposed reform of the processing round approach, this was clearly a less desirable outcome.) Much of the industry’s concerns related to the apparent similarity to the ITU’s first come, first-served approach, which was seen as having compounded the problems underlying the U.S. regime, and the belief that such an approach would trigger an avalanche of new applications filed. Following a lengthy deliberative process, with significant industry input, the FCC held firm, although it ultimately acknowledged that the first come, first-served approach was not suitable in every instance.

The defining element of the FCC’s new regime is the creation of a single queue for all new satellite applications, whether for geostationary satellites (GSO-like) or non- geostationary satellite systems (NGSO-like). As applications proceed to the front of the queue, GSO-like applications will be handled on a first-come, first served basis. However, when a NGSO-like application reaches the front of the queue, the FCC will initiate an expedited processing round by looking toward the apportionment of available spectrum among qualified applicants.

Most of the reforms adopted, as summarized below, were generally applicable to GSO-like and NGSO-like satellite systems:

• All applications are to be submitted electronically, enabling precise time-stamping (for queue positioning purposes), while queue sequencing information will be publicly available.
• Major amendments would result in the loss of an applicant’s place in the queue (except for transfer of control applications).
• Satellite license terms will be extended from 10 to 15 years.
• A freeze was imposed on all satellite applications upon the order’s issuance, ending when a summary of the order appears in the Federal Register.
• Applicants may have no more than five GSO-like satellite systems and one NGSO satellite system (per frequency band) pending applications and unbuilt satellites at any one time, with attribution rules (generally tied to a 33 percent ownership share) applicable with respect to affiliated companies. These limits do not apply to replacements or renewals, modifications, transfer of control, or an U.S. applicant’s foreign-licensed satellites.
• Applications utilizing spectrum not subject to an international allocation will be dismissed without prejudice, although applications can be accepted in the absence of either a domestic allocation (if accompanied by a waiver request) or service rules (on the understanding that future FCC service rule determinations would apply).
• Where no service rules establishing sharing criteria between GSO and NGSO systems in a particular frequency band have been adopted, the FCC will only consider applications of the kind that is filed first; applications for the other type of system will not be considered until sharing criteria have been established.
• Milestone requirements were strengthened; failure to meet a specified milestone will result in loss of the license and forfeiture of any bond (see below). Applicants who establish a pattern of failing to meet milestones (defined as missing three milestones in a three-year period) will be subject to additional restrictions.
• The current financial qualification will be replaced by a bond-posting requirement, provisionally set at $5 million for GSO satellites and $7.5 million per NGSO system, with proportional reduction of the bond amount as successive milestones are achieved. A further notice of proposed rulemaking was issued seeking comments on the appropriate bond level.
• Current restrictions on sales of satellite licenses (known as anti-trafficking rules) will be eliminated to allow license transfers in secondary markets, although safeguards will be maintained to protect against spectrum speculation and other abuses. This also effectively moves the negotiation process from the pre-licensing to the post-licensing timeframe.
• Streamlined procedures were implemented for replacement satellite applications, including “stamp grant” approval for unopposed applications and allowance for certain technical modifications (e.g., increased power levels) if successful ITU coordination can be achieved. Requests for greater coverage area or extended band authority can also be submitted but approval is not automatic. Bond and milestone requirements would not apply to replacement satellites.

One of the more interesting aspects of the order was the FCC’s decision to apply these rules, including the bond and milestone requirements, to pending V-band applications, while deciding that all previously-submitted applications would be deemed to have been filed at the same time. Available V-band spectrum would be divided proportionally (tied to the number of qualified applicants of each type) between GSO and NGSO applications. If applicants have more than five applications on file, any excess must be withdrawn. Further, amendments to change orbital slots to avoid mutual exclusivity will be permitted.

In addition, certain changes implemented were oriented specifically to GSO-like satellite systems:

• Subsequently filed applications will not be kept on file once they reach the front of the queue, but will be dismissed at that time and the applicant will lose its filing fee if a mutually exclusive application has already been granted (although, if the applicant withdraws prior thereto, the filing fee is refunded).
• The “clock” for filing new applications for an orbit location would start running when an order revoking a license is released or upon release of a public notice announcing that a licensee has surrendered its license.
• GSO satellites will have four milestones (contract execution, CDR, commencement of construction, launch and operate) and the bond requirement will be reduced by 25 percent as each milestone is reached.

While for NGSO satellite systems, the following specific changes were implemented:

• If the number of NGSO licensees in a processing round falls below three, each applicant will get only one-third of the spectrum, and remaining spectrum will be set aside for a subsequent processing round or possible reallocation.
• NGSO satellites will have five milestones (contract execution, CDR, commencement of construction, launch of initial two satellites, bringing entire system into service) and the bond requirement will be reduced by 20 percent as each milestone is reached.

The anticipated avalanche of new applications triggered by these licensing changes may not be as likely as many have feared. Exemption of replacement satellites from the queue procedure (and in the C- and Ku-frequency bands there simply are not that many unoccupied slots available to trigger a gold rush) diminishes much of the pressure. Indeed, until virgin spectrum becomes available, the likelihood of a major stampede is minimal.

The most interesting challenge may lie in the creative queue management techniques employed by some applicants, especially in regard to specific orbital slots expected to become available in the future. It would not be at all surprising to see applications submitted, withdrawn and resubmitted, as they progress towards the front of the queue, so as to optimize their position without prematurely reaching the front of the queue until the vacancy actually occurs (since to do so would result in application’s denial and forfeiture of the application fee).

One other area of potential concern involves satellite company mergers, where the new rules would appear to require the merged company to withdraw some previously-granted applications if it winds up with more than five such applications (also requiring forfeiture of the bond and application fees and, most significantly, loss of priority for the associated slot, even if a satellite optimized for that slot were already partially constructed). The only possible remedy here would be to seek a waiver, accompanied by a showing that all the satellites were real (thus, no warehousing was occurring) and withdrawal of any of the granted applications would result in undue hardship.

Maury Mechanick is an attorney at the Washington, D.C. office of White & Case LLP, and a member of the firm’s Telecommunications Practice Group. He can be reached at e- mail: [email protected]