Private Microwave Operators Get Opportunity to Make a Profit on Excess System Capacity

It is axiomatic that a dependable communications system is essential to increased productivity and business efficiency. Many electric utilities, petroleum and pipeline companies, banks, department stores, universities and other users have relied on certain types of private communications systems to satisfy their unique communications requirements. In this regard, since the early 1950s, private microwave systems have been used to meet internal communications needs in order to ensure the provision of critical services to the American public on a continuous, safe and efficient basis.

Under the FCC's rules and regulations, private microwave system licensees were prohibited from leasing reserve communications capacity on a for-hire basis. In a recent proceeding (PR Docket 83-426), however, the FCC has authorized private microwave system operators to lease communications capacity to third parties on a for-hire basis. In addition to promoting more efficient use of radio spectrum, this development has created a revenue-producing opportunity for entities that either currently operate a private microwave system or plan to install such a system in the future.

The FCC's action is expected to foster opportunities for the provision of more-efficient and less-expensive communications services. Private microwave operators will be in a position to tailor their microwave systems to serve large telecommunications users who seek to avoid exchange carrier or even interexchange carrier facilites. By obtaining private microwave services, these users can avoid multiline business end-user charges and carrier common-line charges reflected in interexchange carrier rates.

Services Offered on a Commercial Basis

The FCC's decision allows private microwave operators to offer communications services on a commercial basis to any entity eligible under Part 94 of the FCC's rules. The FCC has liberalized the interpretation of eligible to permit sale to any party that can hold a private microwave authorization. In other words, Part 94 eligibles are not limited to those eligible in the specific frequency band in question. Consequently, even though banks, department stores or other entities solely eligible in the Business Radio Service are still not eligible in their own right to be licensed in the 1850 to 1990-MHz or 6525 to 6875-MHz bands, a petroleum radio service or power radio service licensee may nevertheless offer reserve capacity on its 1850 to 1990-MHz or 6525 to 6875-MHz system to such companies, because these "business radio service eligibles" may hold Part 94 authorizations. This means, for example, that a petroleum, electric or gas company operating at 1850 to 1990 MHz or 6525 to 6875 MHz could sell reserve capacity to any business entity.

The FCC elaborated at length on the public policy reasons underlying its decision to permit private microwave operators to lease channels on a for-profit basis. In this regard, the FCC emphasized that permitting the sale of excess microwave capacity would obviate the need for others to build redundant parallel microwave systems and would enable smaller business entities to take advantage of the efficiencies inherent in the use of private microwave communications, without the capital expenditures associated with constructing such a system. Additionally, the FCC believes that its action will promote spectrum efficiency by allowing existing facilities to be used to maximum capacity, thereby avoiding the construction of unnecessary new microwave facilities or the assignment of additional spectrum to meet marginal communications requirements.

Making Money on Microwave Systems

The FCC will allow entrepreneurs (those without their own communications requirements, but who desire to provide commercial microwave services to others) to license private microwave systems in some of the Part 94 bands, and provide for-profit services to Part 94 eligibles. The FCC, however, decided against allowing entrepreneurs to license systems in the 928/952 MHz, 1850 to 1990-MHz, and 6525 to 6875-MHz bands. The FCC reasoned that allowing entrepreneurs to use these frequencies would effectively negate the prohibition against use of these bands by business radio service eligibles.

The FCC has determined that private microwave licensees who lease excess communications capacity on a for-profit basis will be treated as private carriers, and will be unregulated as to entry and rates, similar to the treatment of Specialized Mobile Radio System (SMRS) operators. The FCC rejected arguments of several parties that it has no legal authority to create private carriers in the private microwave service. Private carrier status ia a critical regulatory classification, since it is one of the bases on which the commission has asserted federal preemption, and distinguishes this activity from those subject to common carrier regulation at the state and federal level.

The key factor in determining whether an entity is a "private" rather than a "common" carrier is whether the entity is either required, or in fact undertakes, to serve the public indiscriminately. An entity is a private carrier where it has the discretion to make individual decisions, in particular case, as to whether and on what terms to provide service. The commission noted that private microwave licensees would be particularly selective in leasing capacity on their microwave systems, because of their concerns with system reliability and their responsibility to meet intra-company needs first.

Selecting Customers with Similar Needs

The FCC noted that there would be little reason to expect that private microwave licensees would hold themselves out to serve the public indifferently, pointing out that private microwave licensees will be likely to establis medium-to-long-term contractual relations with a relatively stable clientele. They will have a strong incentive to select customers whose operations will be compatible with the needs of other users on the system.

The FCC reasoned that the personal and operational compatibility of a potential customer will be one of the foremost considerations when a private microwave operator decides to make its system available to additional users. Such a private microwave operator would not hold itself out indiscriminately to serve the public without jeopardizing the system reliability and operational security essential to effective microwave communications. The commission also determined that any leasing of private microwave facilities is completely voluntary, and no licensee is under a legal obligation to provide service to other entities.

FCC Controls Microwave Carrier Rates

The FCC determined that it will preempt any inconsistent state entry or rate regulation of microwave private carrier operations. In deciding to preempt state regulation, the FCC concluded that its objectives would be frustrated by permitting "multifarious state regulation" of private microwave carriers. State regulation could have the effect of prohibiting or impeding the implementation of private carrier systems, thereby frustrating the FCC's mandate to promote spectrum efficiency and to facilitate the introduction of new communications services.

The FCC's decision to preempt state entry and rate regulation is particularly important in light of recent developments in various states. For example, New Mexico Governor Toney Anaya recently signed into law the "New Mexico Telecommunications Act" that regulates as a telephone company any entity that shares its private microwave system with a third party. Additionally, in conjunction with the New York State Public Service Commission's (PSC's) bypass investigation, an administrative law judge recently released a Recommended Decision advocating that the New York PSC regulate any private communications system operator that leases excess communications capacity on a for-hire basis. These developments, along with any future regulatory actions on the state level, highlight the importance of federal preemption as it relates to for-profit microwave sharing.

FCC Sees Benefits in Resale

While the FCC expressed its concern about the potential impact of the increased use of private microwave facilities on the cost and availability of local telephone service, it found that the sale of private microwave capacity will have clear public benefits outweighing the possible impact on common carrier revenues. Authorization of the sale of excess microwave capacity will create an economic incentive for more intensive use of spectrum, particularly when the system is already built. The FCC anticipates that its action will result in increased spectrum efficiency, as well as increased use of the microwave equipment. Economic incentives to purchase more efficient equipment are created for those who are constructing new private microwave systems. The FCC believes that its decision will benefit small entities who may have vital communications requirements but lack the capital or spectrum resources to operate their own microwave systems.

The FCC also noted that its recently completed study regarding bypass of the public-switched network demonstrated that during the next few years, the most prevalent form of bypass will be "service bypass"--such as the use of private lines--rather than use of private radio systems. Accordingly, the FCC concluded that it would not be in the public interest to restrict the use of scarce microwave spectrum because of concern about possible adverse effects on local telephone service. The FCC pointed out that it would be more appropriate to deal with the cost of local telephone service separately rather than retaining inefficient regulatory restrictions on private microwave licensees.

Finally, the commission indicated that it did not believe that microwave private carriers would have any immediate negative impact on local telephone service.

Southwestern Bell has filed a Petition for Reconsideration, challenging the FCC's decision to treat entities that lease private microwave capacity on a commercial basis as private carriers, and the decision to preempt state entry and rate regulation. Although several parties have opposed Southwestern Bell's petition, the FCC is not expected to issue a ruling for a few months.

Further, as of this writing, the FCC has adopted, but not yet released, a Further Notice of Proposed Rulemaking in PR Docket 83-426 that proposes to permit private microwave licensees to lease excess capacity to common carriers for the transmission of common carrier traffic. The only exception to this proposal is that so-called "dominant carriers" cannot lease excess capacity. As a practical matter, this excludes only AT&T and the local telephone companies as potential lessees of private microwave capacity.

Regulating Fiber-Optic Systems

Finally, because of the absence of any particular controversy, the FCC declined to address the issue of extending federal preemption to state regulation of pure private fiber-optic systems, such as fiber-optic systems that are not interconnected with private microwave links. Potential onerous state regulation could discourage large users who are interested in building a private fiber-optic system to meet internal communications requirements and leasing excess fiber-optic capacity on a commercial basis.

The FCC's decision to allow private microwave licensees to lease excess capacity on a for-profit basis represents another step in the agency's pro-competitive, deregulatory efforts. In addition to promoting more efficient use of radio spectrum, the FCC's action will foster incentives to deploy new technologies. Furthermore, the emergence of for-profit microwave operations represents an attractive opportunity for entrepreneurs and equipment manufacturers, while allowing private microwave licensees to maximize use of existing capital assets.

COPYRIGHT 1985 Nelson Publishing
COPYRIGHT 2004 Gale Group