FCC Spectrum Leasing
There are financial ramifications for buying a larger house than needed; such as proportionally larger maintenance, tax and insurance bills. However, one way to lessen the financial sting is to rent a room or two; or even the entire property. Holders of wireless licenses have this same flexibility. Since 2003, the U.S. Federal Communications Commission (FCC) has allowed entities to lease their licensed wireless spectrum.
Auction winners of wireless licenses occasionally end up with a larger geographic area, or larger spectrum than they are ready to develop, at least initially. Yet, these licenses often require network build out in proportion to the population covered in the licensed area. Moreover, there are time limits to build these networks, with associated penalties for non-compliance.
FCC policy encourages the development of secondary markets in spectrum usage rights. License holders may lease to third parties, some or their entire spectrum, in any geographic area encompassed by the license, for any period of time up to the term of the license. There are two regulatory mechanisms for spectrum leasing; both hinge around the issue of control.
The Issue of Control
In spectrum leasing, it is important to note that, under all circumstances, the entity holding the license must retain legal control of the license. In most cases, legal control is evidenced by holding more than 50 percent of the voting shares. On the other hand, the entity holding the license may or may not retain working control of the license. This depends on the degree of involvement it wishes to keep. Working control of the license means: (1) complying with FCC regulations; (2) making ongoing FCC filings; and (3) being accountable to the FCC for license violations, including causing harmful interference. The two options for spectrum leasing are as follows:
Option 1: “Spectrum Manager” Leasing
Under the “spectrum manager” leasing option, the parties may enter into spectrum leasing arrangements without prior FCC approval. However, the license holder must retain working control of the license. Although the license holder remains primarily responsible, the FCC will hold the lessee independently accountable for compliance with FCC policies and regulations. License holders must provide notice to the FCC within 14 days of entering into a “spectrum manager” lease agreement, and at least 21 days in advance of the start of operations.
Option 2: “Working Control Transfer” Leasing
Under this option, the parties may enter into spectrum leasing agreements in which working control of the leased spectrum is transferred to the lessee for the duration of the lease. In this case, the lessee exercises working control of the license. Consequently, prior FCC consent is required. The lessee will be held primarily responsible for complying with FCC policies and regulations. Also, foreign ownership rules apply to the lessee.
Interestingly, it is possible for a lessee to sublease spectrum under either option. However, the license holder must consent to the sublease in both cases.
In the name of spectrum efficiency, broader use and free flow of spectrum resources, the FCC encourages the leasing of spectrum in wireless frequencies. Under the “spectrum manager” leasing option, it is even possible for parties to enter into a quick transaction with no prior FCC consent. This can be attractive for short-term projects. The “working control transfer” leasing option, especially for the entire term of the license, can be attractive for lessees wishing to exercise control and build a customer base. In either case, the ability for a lessee to sublease the license adds to the attractiveness of entering into a lease.
Raul Magallanes runs a Houston-based law firm focusing on telecommunications law. He may be reached at +1 (281) 317-1397 or by email at raul@ rmtelecomlaw.com.