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FCC’s Bond Obligation Spurs Debate

By | June 9, 2003

      The new bond requirement for a geostationary (GSO) satellite license is likely to discourage startups from obtaining licenses, warned Raul Rodriguez, a partner at the Washington, D.C., law firm of Leventhal, Senter and Lerman.

      As part of its overhaul of the satellite licensing system completed in April, the Federal Communications Commission decided to require satellite companies to post bonds of $5 million for GSO licenses and $7.5 million for non-geostationary satellite licenses. The FCC intends for the bond requirement to discourage applicants that are not serious about offering service.

      “Most new technologies are developed by small entrepreneurs or small units of larger entities. In either case, it will be very difficult to come up with a bond within 30 days after the license is granted,” Rodriguez said during a June 3 panel discussion at a luncheon meeting of the Society of Satellite Professionals International held in Washington, D.C.

      The satellite business is high risk, Rodriguez said. Hundreds of millions of dollars are needed to build and launch a geostationary satellite. The risk is akin to placing a hundred million-dollar spacecraft on top of a “stick of dynamite” and lighting it in a controlled environment, he added.

      Rodriguez said the risks inherent in satellite ventures make them difficult enough to finance, without the additional burden of imposing a bond requirement.

      Tom Tycz, chief of the satellite division of the FCC’s International Bureau, responded to Rodriguez criticism by noting that the FCC is still considering whether the bond level was the “right amount.” He noted that the agency has issued a notice of proposed rulemaking (NPRM) to seek public feedback on that question.

      Tycz said the commission decided on the bond requirement to discourage speculative license applications, particularly since the order overhauling the licensing process eliminates the “anti-trafficking rules” that were aimed at blocking companies for obtaining licenses just to sell them at a profit.

      “The commission wanted some surety that the entity [applying for the license] would go forward and build the system instead of just ‘flipping’ the license,” Tycz said.

      Rodriguez noted that the FCC’s earlier satellite licensing process used deadlines, known as milestones, to ensure that license holders actually built and deployed their systems. “Why can’t that same regime continue … If you enforce milestones, what purpose does the bond serve?” he asked Tycz.

      Tycz responded that the commission “wanted multiple safeguards” to replace the previous anti-trafficking rules. “There was concern that there would be a ‘flipping’ of the satellite licenses just before the milestone and the new owner would ask for an extension … The commission didn’t want that,” Tycz said.

      The FCC official added that there was nothing in the record to indicate what should be the appropriate amount for the bond, apart from Intelsat’s suggestion of $10 million.

      Mark Grannis, a partner at the Washington, D.C., law firm of Harris, Wiltshire & Grannis, also spoke at the panel discussion. He supported the new bond requirement and said that the financial qualifications under the previous licensing system also placed burdens on startups. “They have always had to have the money on hand,” he said. “At least the bond requirement levels the playing field somewhat because now the big guys also have to put real money at risk instead of making purely internal commitments that they can cancel at any time.”

      Trafficking In Licenses

      Grannis said that the “elimination of the anti-trafficking rules will result in a smoothly functioning capital market for satellite projects.”

      However, Grannis expressed concerns about language in the FCC ruling that could prevent licensees from consolidating.

      “There is troubling language in the order suggesting that the commission might deny transfers on trafficking grounds even though the rule was abolished. The commission proposes to ‘examine, if appropriate, whether the seller obtained the license in good faith or for the primary purpose of selling it for a profit, whether the licensee makes serious efforts to develop a satellite or constellation, and/or whether the licensee faces changed circumstances,'” Grannis said.

      Grannis warned that “authorizing an inquiry into the motives of why someone obtained a license brings back all the bad parts of the anti-trafficking rule without even the minimal certainty afforded by having a rule on the books and some text that the commission could be held to.”

      Two FCC commissioners are on record expressing concerns about the elimination of the anti-trafficking rule.

      In a statement issued when the satellite licensing order was released May 19, Commissioner Jonathan Adelstein said: “In eliminating [the anti-trafficking] rule, we potentially also enable speculators to reap financial gains from filing applications for the principal purpose of speculation or other gaming of our revised satellite licensing process.”

      That was a concern shared by Commissioner Michael Copps. He said in his statement: “We are radically changing the satellite licensing system, and we simply do not know how these changes will change the nature of satellite applications or how they might induce speculation. The decision to pull away the safety net of the anti-trafficking rule therefore leads me to concur, as I would have maintained some, even if not all, of its protections.”

      –Fred Donovan and Paul Dykewicz

      (Raul Rodriguez, Leventhal, Senter & Lerman, 202/416-6760; Mark Grannis, Harris, Wiltshire & Grannis, 202/730-1313; Tom Tycz, FCC, 202/418-0735)

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