Revenge of the nerds: Even the most ardent Hill-watchers could be forgiven for not knowing much about Cliff Stearns' bill regarding the FCC reauction of C and F Block PCS spectra. All they need to know is that it's an egregious attempt to let companies off the hook for their financial commitments -- and it's the best thing that could happen.

In January of 2001, the FCC concluded a resale of 3G spectrum licenses formerly held by NextWave, a bankrupt wireless-access firm that failed to pay license fees on time, prompting an FCC seizure of their rights to those airwaves. Almost two years later, the winning companies still don't have their licenses, their payments remain in the custody of the FCC without generating interest, and the Supreme Court will rule in the upcoming term whether or not the FCC had the right to sell those licenses in the first place.

The spectra in question are for use in third-generation, or "3G" technologies, such as high-capacity wireless net access for mobile devices or computers. NextWave originally purchased the licenses in a 1996 small-business block auction, which allowed bidders to pay by installment, on the assumption that small companies would be unable to line up immediate capital for license purchases. Economists at the time objected to the installment plan, arguing that it would create a tendency to overbid on spectra sales.

NextWave's winning bid, at $4.7 billion, justified these fears; in an attempt to capitalize on the high price of spectra, the FCC began a new round of auctions, increasing the supply, depressing prices, and leaving NextWave with a very expensive white elephant. When NextWave was unable to pay an installment on their licenses, the FCC revoked them and scheduled a new round of auctions.

Unable to secure capital, NextWave went to bankruptcy court, arguing that the FCC's subsequent auctions resulted in their current financial problems, and that the FCC's attempt to revoke their 3G licenses conflicted with 11 USC § 525:

[A] governmental unit may not ... revoke ... a license ... a person that ... has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.

As the courts ruled, reversed, and eventually dispatched the case off to the Supreme Court for an early October hearing, the FCC conducted its December 2000/January 2001 auction at a time when spectra prices were again high, selling off NextWave's licenses to multiple companies for a record $16 billion (net).

Under the rules of the new auction, the FCC demanded payments up front, including $2.6 billion from AT&T Wireless, and $1.7 billion from Cingular. However, because of the ongoing dispute with NextWave, the FCC was unable to deliver the licenses. Fearing hat they might be bitten again by nonpayment for licenses, they elected instead to hold the payments, without interest, until the license issue was resolved.

The FCC later refunded most of the bid deposits, but retains 3% of obligation, and affirmed the right to collect the full amount within ten days of issuing licenses.

There are those, including several conservative economists, who argue that the NextWave license imbroglio is responsible for halting the growth of 3G wireless services. This is not a tenable argument; firstly, because the NextWave spectra are not the only 3G spectra in the market, and secondly, because slow customer adoption, a dearth of mobile systems capable of handling 3G services, and continued technological development that may attenuate the value of 3G spectra services are all reasons that we don't carry Gnutella clients around on our cellphones.

Stearn's bill (H.R. 4738, introduced in the Senate as S. 2869) is in part an attempt to rectify the situation. There are two parts to the bill; the first states that,

On or before the 15th day after the date of enactment of this Act, the Federal Communications Commission shall return to the winning bidders of auction 35 the full amount of all deposits and downpayments made by such winning bidders for licenses that the Commission has not by that date delivered to such winning bidders.

Given the FCC's refund of 85% of bid holdings, this is less important than it was in May 2002.

The second part provides that,

Each such winning bidder that elects, by formal written notice to the Commission on or before the 15th day after the date of enactment of this Act, to relinquish its rights under auction 35 to receive a license for which it was the winning bidder, and which the Commission has not delivered to such bidder by the date of such election, shall be free of all obligations such winning bidder would otherwise have with respect to such license, including the obligation to pay the full amount of its winning bid upon delivery of such license.

It's the second part of the bill that's critical, and that Congress should continue to work towards passing. The spectra sold under auction 35 are not worth $17.5 billion. Period. Every company that came out of the F and C Block auction suffered the "winner's curse" of paying too much for an asset. Almost a year later, with the economy struggling, the technology itself slow to be adopted, and the companies having to carry the costs of the spectra licenses as liabilities, a great deal of potential productivity has been wasted, and the companies' flexibility going forward will be constrained.

If this were a private auction, there would be no question of letting the winners off the hook. But this is an auction for public benefit, and the rules are accordingly different. Adding $16 billion to the Treasury, when contrasted with letting companies continue with profitable investment, is not a sufficient reason to continue with a struggle for licenses that has already gone on too long.

Here's a corporate welfare bill I can live with.