Several C-block licensees are questioning the 7 percent interest rate used by the Federal Communications Commission in payment plan notes, but the government stands behind the figure.
The difference between a rate of 6.5 percent and 7 percent is significant for licensees that owe hundreds of millions of dollars for licenses to operate personal communications services. Ultimately, the difference “could mean overcharging licensees about $320 million,” according to a letter sent to the FCC by Omnipoint PCS Entrepreneurs Inc.
“The rate of 7 percent as currently listed in the commission’s Block C Installment Payment Plan Note reflects the July 1996, Treasury auction results, but in no way reflects the government’s cost of money at the time of issuance of the Block C licenses on Sept. 17,” states Omnipoint.
The FCC said it would impose interest on the 10-year loans at the rate of U.S. Treasury obligations closest to the date the licenses were issued.
Licenses were issued to most C-block companies on Sept. 17. So, the FCC applied the Treasury rate from July, which was 7 percent. The August auction also produced a rate of 7 percent, said Jerome Fowlkes, senior financial analyst for the auction division of the FCC’s Wireless Telecommunications Bureau.
“We went back to the rate on U.S. Treasury obligations on the most recent auction that had occurred,” Fowlkes said. “The Treasury gives us the rate because we don’t want to be pulling it out of the air. Clearly this issue has a lot of importance for the licensees.”
Omnipoint suggests the government should use the yield figure of 6.535 percent from the August Treasury auction rather than the interest rate.
“Alternatively, the commission could use the note rate set in the October 1996 Treasury auction of 6.5 percent because it was closest in time to the issuance of the licenses,” Omnipoint said.
C-block rule books don’t clearly state which rate will be used, said licensee Vincent McBride. McBride is the smallest C-block licensee, holding a single license for Williston, N.D. He owes the government the principal sum of $416,479.
“It just says they’ll use the Treasury bill rate, not whether it’s the interest or yield rate. And now the rates are dropping. Why should NextWave be granted a lower interest rate?” McBride said.
The licenses won at auction by NextWave Telecom Inc. and several other C-block bidders have been contested and haven’t been granted. If those licenses are eventually granted, those companies likely will pay a different interest rate than companies that followed the government’s rules and met the requirements to receive their licenses on time, McBride said.
Thus, the government could be rewarding those companies with contested licenses with a lower interest rate, he said.
Omnipoint also argued that the July rate of 7 percent was a spike in 10-year note rates, the highest rate charged since the February 1995 auction. The spike was probably due to fear in July that the Federal Reserve would raise interest rates, Omnipoint said.
The interest rate on 10-year T-notes was 5.625 percent in the February auction earlier this year, and 6.875 percent in the May auction. By July and August, it had risen to 7 percent.
The situation is not different from a person locked into a mortgage shortly before interest rates drop, Fowlkes said.
Omnipoint also made these arguments to the FCC:
The August auction was not reflective of typical Treasury auctions because the note rate didn’t reflect current market conditions.
The August auction was actually a re-opening of the July 1996 Treasury auction, which produced a yield of 7.016 percent and a rate of 7 percent.
Omnipoint said, “This [rate] decision frustrates the commission’s policy objective for the small business entrepreneurs to pay `no more than the government’s cost of money.”‘
Following a Treasury auction, the government uses the rate to formulate a yield, “which represents the actual, composite return that purchasers of the notes will receive,” Omnipoint said. “Viewed from the perspective of Treasury, this market-driven rate is the interest that the government actually pays for the use of private investors’ money.”
The note rate is fixed according to the nearest 1/8 of 1 percentage point below the yield. And generally, the rate is close to the yield, Omnipoint said. Not so with the auctions used by the FCC to set the C-block interest rate, the company said.
In other C-block related news, the FCC has issued revised security agreements to clarify two points. First, transfers of C-block licenses require a new note be drawn up with the buyer. The note doesn’t transfer. C-block licensees can sell their licenses during the first five years only to other companies meeting the “entrepreneur” qualification, and can sell to anyone after five years.
