Questions Rise Over FCC's Action

The U.S. Bankruptcy Court ruled Monday that the Federal Communications Commission acted unlawfully in revoking NextWave Telecom Inc.'s PCS licenses while the issuer remained under Chapter 11 protection.

NextWave originally bid $4.3 billion for the spectrum in a 1996 FCC auction, but after a precipitous drop in the market value of the licenses, the company filed for Chapter 11 protection. After securing additional capital in December, NextWave filed a modified plan of reorganization and announced it would pay the FCC the full amount owed for the licenses.

Still, the case has been mired in the court system. Following a Second Circuit Court decision in mid-January that granted the FCC exclusive jurisdiction over the licenses, the FCC revoked NextWave's licenses, arguing that it was acting in a regulatory capacity, not as a creditor.

The Bankruptcy Court last week called the FCC's actions void and without effect. In a statement, the court said, "There exists a host of protections, not only for the benefit of NextWave, but for the benefit of all constituent parties including the FCC, designed to ensure the rational, systematic and equitable reorganization of the estate. Self-help repossession by ambush is not one of them - It is repugnant to the very essence of the Bankruptcy Code."

Still, the FCC is expected to appeal.

The Bankruptcy Court is the lower of the two courts in this case. A lot of people didn't think the decision mattered, only because it's expected to go back and forth through the courts," said wireless analyst Jennifer Murtaugh of First Union Securities.

Investors echoed similar reactions. Trading on both NextWave and Nextel's junk paper was relatively unchanged.

"The Second Circuit Court already ruled that the FCC has exclusive jurisdiction," said one industry source. "The bankruptcy judge's decision was emotional, stem-of-consciousness, defensive. We fully anticipate the Department of Justice, representing the FCC, will appeal and take it back to the Second Circuit. The bankruptcy judge is relatively moot at this point."

Wireless Spectrum at

Center of Battle

NextWave holds C-Block and F-Block PCS licenses, designated as Entrepreneur Block spectrum by the FCC. Bidding is limited to companies whose assets do not exceed $500 million and whose gross revenues did not exceed $125 million during the previous two years.

The FCC, however, is considering changing the bidding rules for the re-auction to include bigger wireless players.

Nextel has already filed a request for waiver of the eligibility requirements to allow it to participate in the PCS C-Block and F-Block auction scheduled for July 26. The company also argued that the spectrum should be broken up into 90 licenses, 10 MHz and 20Mhz blocks, to allow bidders to buy smaller chunks of spectrum.

Analysts have long warned that Nextel is capacity-constrained and lacks the spectrum needed to complete its current build-out. Murtaugh, however, said Nextel has enough spectrum to service 27 million subscribers. The company is expected to have nine million wireless subscribers.

Still, as the demand for wireless data and third-generation technologies grows, the spectrum will not be enough.

"There's plenty of spectrum for voice services, but technology has raced way beyond that," said one Nextel source.

In negotiations with the FCC last year, Nextel agreed to pay up to $8.3 billion for NextWave's licenses.

"They're desperate for the spectrum - just look at their actions. The FCC's argument that it wants to uphold the rules of the auction is a crock of you know what," said one analyst.

Baby Bell SBC Communications Inc., for its part, followed the suit with a similar motion early last week. It requested a waiver of the bidding requirements, arguing that its participation "in the upcoming C- and F-Block auction would serve the public interest by speeding the delivery of wireless services to the public and enhancing competition in numerous market areas."

FCC officials could not be reached for comment.