Satellite Licensing Reform: One Year Later

By | June 7, 2004 | Feature

By Maury Mechanick, White & Case

About a year has passed since the Federal Communications Commission (FCC) announced a new satellite-licensing regime. In a fairly bold stroke, the FCC implemented a radical and paradigmatic shift away from satellite-licensing processing rounds to a first-come, first-served approach that uses a queue to establish priority. At a more conceptual level, the FCC eschewed three decades of satellite licensing decision-making that relied on an embedded philosophy of managing orbital resources and of opting to adopt a more market- oriented, laissez faire approach. With the first anniversary of that decision now upon us, a retrospective on the past year is timely.

No Gold Rush Yet

One of the biggest predictions a year ago was that the new licensing regime would trigger a gold rush of monumental proportion. The reasoning was that everyone would fear any delay in filing would be fatal. No such result, however, has materialized. To be sure, on the day the FCC started accepting license applications following the three-month freeze (adopted as part of the switchover to the new regime), there was an initial flurry of activity. Of course, this may have been attributable to the lifting of the freeze itself.

Somewhat more dramatic is the spate of application withdrawals, driven to a large degree by the FCC’s renewed commitment to more serious enforcement of milestone obligations imposed on satellite operators. The “rule of five,” which limits the number of geostationary orbit (GSO) applications an individual company can have pending at any one time, also could have contributed to this phenomenon. Even in instances where the newly established bond requirement (discussed in more detail below) is not a factor, operators have, for the first time, begun to voluntarily withdraw their applications when the future viability of a proposed system is in question.

Replacement Satellites

One factor narrowing the potential impact of the new regime is that it does not apply to replacement satellites. Thus, with respect to conventional C- and Ku-band fixed satellite services (FSS) satellites, where the most valuable real estate has already been assigned, renewal rights now are firmly established. As a result, the most contentious licensing activity is past history. Indeed, the impact of the new regime is comparatively subtle.

To be sure, given the current retrenchment in the industry, some previously occupied slots should become available in the future. In light of the sporadic nature in which this is likely to occur, the focus on individual decisions managed via a queue rather than by a processing-round approach should result in the new regime handling such licensing matters much more equitably and timely than it did in the past.

The Battle Of The Bond

The new licensing regime’s most controversial feature, by far, is its bond requirement. The FCC’s bond requirement was intended to substitute for the previously imposed need for an applicant to show the “financial qualifications” necessary to pursue a venture. That hurdle was meant to prevent an applicant from engaging in purely speculative activities aimed at accumulating and selling spectrum rather than achieving an operational objective. The bond requirement provisionally was set at $5 million for GSO systems and at $7.5 million for non-geostationary orbit (NGSO) systems, with proportional reductions as successive milestones were achieved. The FCC itself has been fairly open about what amount would be appropriate for a bond requirement. The agency issued a further Notice of Proposed Rulemaking to solicit feedback about the bond requirement, and the agency is expected to respond in the next several weeks.

Not surprisingly, a number of views about the bond requirement have emerged. Some oppose the imposition of any meaningful bond requirement altogether. The rationale is that the requirement either is unnecessary or is punitive by imposing an additional financial hurdle on startup companies trying to marshal limited financial resources. Others suggest the bond requirement simply is another regulatory hurdle that constrains, rather than fosters, market forces. That view resurrects one of the concerns that actually prompted adoption of the first-come, first-served licensing approach.

Some who have accepted the need for a bond requirement suggest a fundamental restructuring. One example is the “business-friendly” bond requirement touted by SES Americom. Under this concept, the initial bond is set at a much lower level but it would increase rather than decrease as successive milestones are met. The thinking is that an operator’s financial capabilities would become more solidly grounded as its pet project develops. On the other hand, Intelsat has emerged as a fairly strong advocate of the existing bond requirement.

In sorting out these conflicting positions, the FCC should focus on what the bond is supposed to do and what it is not supposed to do. The need for some deterrent against blatant speculation is real. It requires some form of carrot-and-stick incentive. The objective, however, should be to deter such speculation and not to punish the serious entrepreneur who ultimately is unsuccessful. My prediction is that the FCC will keep the basic concept intact, but with some downward revision in the bonding levels. There also may be some greater flexibility in defining the type of financial instrument sufficient to satisfy the bond requirement.

Life In The Queue

Controversy regarding “queue management” has not been a major issue so far, with one exception: the relative priority between Mobile Satellite Ventures Subsidiary LLC (MSV) and EchoStar Satellite LLC at the 101 degrees W orbital location. At issue here is the impact of certain “procedural” decisions involving compliance with specific filing requirements and the impact of dismissal of amendments on relative queue position. While this type of controversy is something the FCC undoubtedly had hoped to avoid, it may well be an inevitable consequence of any first-come, first-served regime.

Changing The Past

One intriguing question is whether the new regime, if it had been adopted ten years earlier, could have forestalled some of the real disasters of the past decade. For example, what impact, if any, would this type of regulatory streamlining have had on Iridium, Globalstar and ICO? Would the elimination of regulatory delay have improved the financial and operational risks confronting these systems in a way that their chances for success could have improved? Would a more rigorous milestone program have resulted in abandonment of these efforts before the losses reached such astronomical levels? I suspect that any differences more likely would have been in the direction of the latter rather than the former. At the same time, the 1990s were an entirely different era, and it is not at all clear whether faster decision-making accompanied by more rigorous implementation requirements would have had any meaningful dampening on the exuberance of the times.

The more telling question, which really cannot be answered today, is whether this regime can help forestall future failures from occurring.

Maury Mechanick, a former chairman of the Intelsat Board of Governors, is of counsel with the Washington, D.C., office of law firm White & Case LLP, and he is a member of the firm’s Telecom, Media and Technology Group. He can be reached at 202/626-3635 or at mmechanick@whitecase.com.

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