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CIAO DATE: 12/03
The Price of FCC Integrity: $15 Billion
On The Issues
September 2001
In reauctioning wireless licenses legally controlled by the bankrupt firm NextWave Telecom, the Federal Communications Commission acted both shamefully and foolishly. The Supreme Court, if it chooses to rule on the FCC's appeal, should affirm a circuit court's decision to return the licenses to NextWave.
In early August, the federal government decided to appeal the case of a federal licensee, NextWave Telecom, to the Supreme Court. A lower court had found that, similar to other property owners, NextWave has certain protections in bankruptcy court. Government officials claim the appeal is necessary to preserve the "integrity of the auction process" by which the licenses were assigned.
While there are doubtlessly many reasons the government has appealed the decision, integrity is not one of them. The primary reason for the appeal is money, and lots of it.
In short, the lower-court decision means the sudden disappearance of more than $15 billion in federal receipts-money the Federal Communications Commission made by rashly reauctioning NextWave's licenses before the court decisions. Federal government circles are abuzz with the problem of how to make up the shortfall. But the real scandal is why the federal government ever risked its own integrity to trample property rights.
As required by a new law, the FCC began auctioning rights for licenses among competing parties in the mid-1990s. The auction process is an efficient means of assigning licenses. A simple auction process as required by law would be difficult to violate, but the FCC tarnished the integrity of the process by allowing winning bidders to pay through installments, a method not required by law.
NextWave, a once-and-future wireless company, sought bankruptcy protection after having acquired many wireless licenses in auctions, but having only partially paid for them. The federal government and NextWave went to court. The federal government claimed that, by nonpayment of debt, NextWave forfeited the licenses to the FCC. NextWave claimed that the rights to the licenses remained its property in bankruptcy court. The federal government tried different tacks in a series of court battles. But after the recent circuit court's unusually stinging decision in favor of NextWave, the government is looking at very long odds by appealing to the Supreme Court.
To complicate matters, the FCC, in the middle of litigation, recklessly reauctioned the disputed NextWave licenses–over objections from both inside and outside the agency. The very agency that now claims to defend the integrity of the auction process had actually placed it at risk.
A champion of the integrity of the auction process would not have held the auction for at least three reasons. First, the FCC did not have clear legal control of the licenses; pending litigation might, and subsequently did, return them to NextWave. The FCC even stipulated to the court that, should NextWave prevail, it would receive the licenses. Second, the litigation was expected to end in a matter of months, giving little reason not to wait for legal resolution.
Third, the mere spectacle of auctioning property of dubious legal ownership would frighten away legitimate bidders. And those businesses willing to participate in such an auction would doubtlessly bid less than they would if the commission had clear title to the licenses. Even if the commission were to have won in court, the American taxpayer would have been better off if it had waited to get clear title.
Companies such as Verizon and VoiceStream, and new affiliates of AT&T and Cingular, bid in excess of $15 billion for the rights to the NextWave licenses. The auction participants were betting that the FCC would ultimately prevail in court, but they calibrated their bids downward to account for the legal risk. Some tried to reduce the risk by making substantial efforts to buttress the FCC's doomed position in court.
Yielding to Temptation
The prospect of money blurred legal and even moral decisions. Not only did the FCC vigorously promote and support the reauction, but other parts of the federal government did as well. The Department of Justice helped with litigation. The budget agencies treated the winning bids, which were little more than lottery tickets waiting for court decisions, as if they were money in the bank.
The current legal quagmire was not unpredictable. And while the government may yet win its gamble in the Supreme Court, it well may not.
Unfortunately, a government that yielded to temptation rather than better judgment has yet to grasp the errors of its ways. The lessons from taking and selling property are clear-unless, so it seems, the party engaged in these activities happens to be the federal government itself.
Governmental discussions have not revolved around how to compensate NextWave or the parties induced to participate in what courts have now ruled to be an unlawful auction. No, government sympathies seem first and foremost with itself, and how it will fill the $15 billion shortfall. Reports describe a government considering offering NextWave some money to go away. The implicit threat is that, if NextWave declines a lowball offer, it will suffer a death by a thousand cuts in the regulatory processes.
The federal government also seems determined to preserve the reauction winners. Yet unless the government prevails in the Supreme Court, no ex post facto scheme by the government, nor even concessions by NextWave, can make legitimate the results of a federal auction for licenses lawfully controlled by NextWave.
It is not too late for the federal government to redeem itself. Salvation rests not in finding some or all of the $15 billion it never owned. Rather, redemption comes when it sobers up and answers a harder question: Why was it recklessly gambling on its integrity and moral authority in the first instance?
Harold Furchtgott-Roth is a visiting fellow at AEI and a former commissioner of the Federal Communications Commission.
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