Death, taxes, and for potential PCS licensees, microwave relocation are issues no one wants to face. Yet, like the first two, the consequences of ignoring the issue could be devastating.
Following the Federal Communications Commission auctions, winning bidders could find themselves having paid tens or hundreds of millions of dollars for access to spectrum they cannot use, potentially for up to five years. Those who are unprepared may discover they not only must pay millions more to clear the spectrum, but their hopes for early entry into the marketplace are replaced by the frustrations of protracted negotiations over the terms of the microwave relocations.
As a percentage of the cost of building a new personal communications services system, the costs of relocating microwave systems may seem insignificant, even though estimates vary anywhere from $50,000 to more than $1 million per link, depending on the engineering and hardware costs and the level of incumbent cooperation during the relocation process.
Perhaps more important, however, is that negotiations may require years, and the FCC has never concretely defined “comparable system,” a term that will eventually determine the system that a PCS licensee must provide to the incumbent.
Therefore, potential PCS bidders must carefully review not only the cost of incumbent relocation, but the time and human factors in planning their auction bids and operational strategy. It will be difficult, if not impossible, to accurately plan a financial model of a new PCS system without first considering a detailed pre-auction analysis of the interfering microwave links in each potential basic trading area and metropolitan trading area. Every market is unique, and every incumbent will have different requirements that will have to be met before they accept relocation to a new frequency.
FCC guidelines for relocation
Broadband PCS licensees bear the onus for noninterference with existing microwave incumbents in the 2 GHz spectrum. The process of moving incumbent microwave licensees from the spectrum allocated by the FCC for new PCS to other frequency bands is governed by the FCC’s emerging technologies microwave relocation rules in Docket 92-91.
This responsibility includes a financial obligation to provide a comparable microwave system on another frequency and to provide for the actual relocation expense of the incumbent. The regulatory framework adopted by the FCC is intended to provide PCS operators with access to the 2 GHz frequencies in a reasonable time frame and, at the same time, prevent disruption and RF interference to the existing communications services provided by the microwave incumbents. The FCC reallocation rules encourage incumbent licensees to voluntarily negotiate relocation agreements with PCS providers intending to implement emerging technology services.
The FCC has set two separate time frames for the negotiation process between the PCS licensee and the incumbent. Public safety microwave users will have a four-year window for voluntary negotiations, followed by a one-year mandatory negotiation period.
Microwave incumbents with co-primary status will have a two-year window for voluntary negotiations, followed by the one-year mandatory negotiation period. Microwave incumbents that occupy frequencies in the spectrum allocated for unlicensed PCS are subject to a one-year mandatory negotiation period. If no agreement can be reached after the mandatory negotiation period, the PCS licensee can seek to revoke the microwave incumbent’s co-primary status. Regardless of when a relocation agreement is reached, the PCS licensee must pay for a comparable replacement microwave system.
The relocation process
There are several steps to the actual relocation process, many of which can be accomplished prior to the auction. Before potential bidders can accurately determine the value of a license in a specific market, it is essential to know both the relocation costs and the time that will be required to negotiate the relocation. The following is a list of the tasks involved:
Identify the microwave incumbents within the targeted MTA or BTA blocks, as well as those operating on adjacent channels and within a “coordination distance” of the market that may be subject to interference from your system.
Establish a timetable and financial cost projection based on the priority and immediacy of clearing each interfering link.
Formally notify incumbents of your desire to relocate them to start the time clock.
Develop a frequency coordination database.
Determine what frequencies are available for the incumbents’ relocations.
Notify any other beneficiaries of your relocations to address potential cost-sharing arrangements.
Begin initial contact with incumbents to determine current system configuration and time-line relocation for each link.
Determine expectations of the incumbents’ engineers and management for the replacement systems.
Perform an engineering analysis to determine the most suitable and cost-effective replacement system, or where appropriate, an alternative technology (e.g. fiber, 220 MHz, etc.).
Enter into written contracts with incumbents to establish the relocation plan, including final details on technology replacement, cost reimbursement, additional financial compensation/inducements and final time tables.
Obtain the license and coordinate frequency for new systems.
Obtain bids for constructing the new systems and sign contracts with winning bidders.
Construct, operate and test the new system in parallel with incumbents’ systems.
Begin operating the new system upon incumbent approval and satisfaction.
Take possession and dispose or sell the original 2 GHz system.
Relocation issues and pitfalls
Negotiations are likely to include different incentives for different types of incumbents. Some incumbents will be satisfied with a new system of comparable reliability and capacity. Incumbents will be able to defer capital gains taxes on new equipment and will have a minimum of inconvenience.
Other incumbents will be interested in joint venture opportunities with PCS licensees or other business opportunities. Some corporate incumbents may choose to handle the relocation themselves. Under these circumstances, the focus of the PCS licensee will be on coordinating the auditing and reimbursement of expenses and incumbent adherence to the negotiated time line.
Moreover, human factors, which weigh heavily on the outcome of any negotiation, will be particularly important for microwave relocations. Each incumbent must be convinced on a personal level that the proposed relocation is a benefit to them.
But there will be other incumbents who will delay negotiating until greater incentives are offered. And some incumbents may refuse to even consider relocation until the voluntary period has elapsed. Here it will be crucial for licensees to set precedents early, minimizing the cost and type of incentives offered to those that demand more than a simple relocation.
Incumbent negotiations will be highly complex and potentially costly for the PCS licensee. There are a tremendous number of issues that will need to be addressed beyond the type of replacement equipment and cost. These include warranties, liabilities for non-performance, insurance requirements, construction bonds, duration of obligation for leased facilities and sales and use tax responsibilities.
Moreover, human factors, which weigh heavily on the outcome of any negotiation, will be particularly important for microwave relocations. Each incumbent must be convinced on a personal level that the proposed relocation is a benefit to them. Ultimately, the technical superiority of one technology over another will not automatically generate a decision maker’s signature-that must come from the persuasive skills of the PCS licensee’s agent.
The FCC has provided several incentives for incumbents to relocate in a timely manner, including better availability of lower frequency spectrum, better availability of new equipment, capital gains tax deferrals for the acquisition of new and improved microwave systems and removing the uncertainty for future planning purposes.
There are, however, many potential pitfalls and complications endemic to the relocation process. Set forth below are factors that could cause the negotiations to become acrimonious and/or technically complex:
Though it has mandated that 2 GHz incumbents relocate to a comparable system at a different frequency, the FCC has only broadly defined what is comparable.
Many incumbents may view subsidized relocation as an opportunity to substantially upgrade their systems, while staying within the FCC parameters of negotiating in good faith. Incumbents are likely to request compensation for potential business disruption, staff time and other indirect costs generated by the relocation. This compensation may be in the form of greater reliability, increased capacity, or some other form of financial incentive.
If the new system fails to meet or exceed the standards of the incumbent’s prior system, the PCS licensee must remedy the defects or pay to relocate the incumbent back to the original 2 GHz frequency. Incumbents have a one-year period in which to request such remedies.
Another potential problem will occur when the PCS licensee only needs to move a single link in a multi-hop system. Because of cost concerns, most PCS licensees will approach relocations on an individual link basis. Incumbents, however, will generally be concerned about their entire microwave systems, not just a single link.
Incumbents will become frustrated when having to negotiate with multiple parties. They may look for additional compensation or incentives to relocate those individual links in their system, or they may postpone relocation until all parties have compensated them.
Like death and taxes, the need for microwave relocation is a certainty for broadband PCS licensees.
Many systems have half of their paired links in the band allocated to one PCS license, and the other half in another designated PCS band. Relocation of this system therefore provides benefit to a competitor and issues related to cost-sharing arise.
PCS licensees also may have to negotiate with incumbents in adjacent channels to avoid interference. These relocations not only add financial burden to the relocation process, but provide benefits to a competitor.
For those relocations providing benefit to other licensees, a PCS service provider may desire to share the cost of relocating those affected links. This is commonly referred to as the “free rider” issue.
Another large potential pitfall will be the relocation of public-safety incumbents. Public-safety incumbents are not compelled to move from the 2 GHz band for up to five years, and clearing them in a timely manner will require more complex negotiations than incumbents with shorter time frames. Additionally, obtaining the necessary bureaucratic approvals in a government agency can greatly slow down the negotiating process.
We already have encountered a state agency willing to relocate as part of its plan to upgrade its extensive multi-link system. However, it must first obtain the necessary appropriation of funds from the state legislature to pay for its share of the new system, which may take years.
Recommendations
Like death and taxes, the need for microwave relocation is a certainty for broadband PCS licensees. Advance planning can minimize its impact, but ultimately relocating incumbent microwave licensees in the 2 GHz spectrum will be a highly complex and potentially costly endeavor.
PCS licensees must consider the costs and human factor issues related to relocation in their pre-auction planning and financial modeling. Furthermore, for those hoping to enter the market early, now is the time to begin making preparations. Those who wait until after the auctions may find themselves facing years of negotiations, followed by months of waiting to obtain new microwave equipment and for it to be installed.
Therefore, while there may seem to be many more pressing issues to address in preparing for the auctions and deploying PCS, now is the time to obtain the resources necessary to ensure the microwave relocation process occurs as efficiently and inexpensively as possible.
Thomas A. Stroup is the former president of the Personal Communications Industry Association and is the president and chief executive officer of Columbia Spectrum Management, which provides negotiation and microwave relocation services to the PCS industry.