UNITED STATES COURT OF APPEALS FOR THE D.C. CIRCUIT


FRESNO MOBILE RADIO

v.

FCC


97-1459a

D.C. Cir. 1999


*	*	*


Ginsburg, Circuit Judge: Before us are petitions for review  of two
Federal Communications Commission rules creating a  new class of radio
spectrum licenses for bandwidth in the 800  MHz range. Petitioner
Southern Company, which holds nu- merous licenses in that range,
asserts that the rules violate a  recently-enacted statute that
requires the agency to treat all  similarly situated commercial
licensees comparably. Petition- ers Fresno Mobile Radio, et al., and
SMR WON, a trade  association of incumbent licensees in the 800 MHz
range  contend that the Commission, among other things, exceeded  its
statutory authority when it decided to distribute the new  licenses by
auction, failed adequately to protect the interests  of small
businesses in setting the rules for the auction, and  unlawfully
modified existing licenses without holding eviden-


tiary hearings. Nextel Communications, Inc., which pur- chased the
great majority of the licenses awarded thus far  under the new rules,
has intervened in support of the Com- mission.


We hold that the Commission failed adequately to explain  its disparate
treatment of incumbent and new licensees, and  therefore grant
Southern's petition for review. We reject  each of the other
petitioners' arguments, however, and con- clude that the agency acted
within its discretion in deciding to  allocate the new licenses by
auction and otherwise proceeding  as it did.


I. Background


In 1974 the Commission created the Specialized Mobile  Radio service.
SMR licensees use bandwidth in the 800 MHz  and 900 MHz ranges to
provide "land mobile communications  services" on a commercial basis.
47 C.F.R. s 90.7. Until  recently the vast majority of SMR licensees
provided local  dispatch services for taxis, ambulances, and the like.
In the  last few years, however, an increasing number of SMR licen-
sees have begun to use their spectrum for more ambitious  purposes--in
particular, the provision of cellular telephone  and data transmission
services over a wide area.


At first these licensees faced a difficult regulatory environ- ment.
For example, the Commission separately licensed each  individual
transmitter and small group of channels; that  made it expensive and
time-consuming for a licensee that  wanted to provide cellular
telephone, data transmission, or  other services to get authorization
for the large number of  transmitters and channels required for those
services. They  were also hampered because most of the SMR bandwidth
had  already been licensed. Furthermore, the Commission's  "build out"
rule, which obligated the SMR licensee to com- plete its facility
within one year of receiving its license,  weighed particularly upon
any licensee trying to build a wide  area system.


The agency began to respond to these problems in 1993.  First, it
extended the time for an SMR licensee to build a 


wide-area broadcasting system to as much as five years.  Next, it
proposed to offer large blocks of bandwidth and  coverage of a large
geographic area in a single license. See 8  F.C.C.R. 3950 p 7


Meanwhile, in August, 1993 the Congress amended s 332 of  the
Communications Act of 1934 to require the Commission to  classify all
mobile radio services as either "commercial" or  "private." 47 U.S.C.
s 332(c). As to certain services that  had been considered private
under the prior definition but  now would be classified as commercial,
the Commission was  required to promulgate "technical requirements
that are com- parable to the technical requirements that apply to
licensees  that are providers of substantially similar [commercial]
ser- vices." Pub. L. No. 103-66, s 6002(d)(3)(B), 107 Stat. 312 
(1993). To fulfill this mandate, the Commission began a new 
proceeding in which it concluded that SMR licensees offering 
for-profit interconnected services--i.e. those involving both  radio
and landline telephone communications--are "substan- tially similar"
to cellular telephone and Personal Communica- tion Service (PCS)
providers, and should therefore be subject  to comparable regulatory


In order to put SMR on a footing more nearly equal to  those of other
licensees, the Commission then adopted a  system for the upper 200
channels of the SMR bandwidth  pursuant to which it would auction off
licenses for each of 175  newly-designated "Economic Areas." Each EA
license would  include a large block of spectrum for the entire
geographic  area, thereby making transmitter-by-transmitter and 
channel-by-channel licensing unnecessary. To help EA licen- sees
obtain the contiguous spectrum needed to provide com- petitive
wide-area services, the Commission also determined  that any EA
licensee shall be able to force any incumbent  SMR licensee to
relocate to the lower 230 channels of SMR  spectrum, provided the EA
licensee gives the displaced licen- see comparable facilities and
spectrum, pays the expenses  associated with its relocation, and
ensures it a "seamless"  transition between the old and new
frequencies. The Com- mission also relaxed the build out rule for EA
licensees:  Under its new "interim coverage requirement," an EA


see must provide service to one-third of the population in its  area
within three years, and to two-thirds of the population  within five
years, of the award of the license. The agency  declined, however, to
extend this rule to incumbent SMR  licensees. Instead, it gave them a
maximum of two years to  complete construction of their systems. See
Amendment of  Part 90 of the Commission's Rules, First Report and
Order,  11 F.C.C.R. 1463, pp 105-114 (1995) [First Report and


On reconsideration, the Commission adhered to this new  regulatory
scheme for the upper 200 channels of SMR band- width but changed its
pre-existing method for giving small  businesses an advantage in the
auction process. Specifically,  the Commission rescinded its policy of
allowing small busi- nesses to pay for licenses in installments, and
instead created  a system of bidding credits for which only small
businesses  could qualify. See Amendment of Part 90 of the Commis-
sion's Rules, Memorandum Opinion and Order on Reconsid- eration, 12
F.C.C.R. 9972, pp 125-32 (1997) [Reconsideration  Order].


In June, 1997 the Commission adopted a similar set of rules  for the
lower 230 channels. Again, the agency decided to  auction off new EA
licenses, each of which would cover a wide  geographic area and a
large block of spectrum. It did not,  however, grant EA licensees in
the lower 230 channels the  right involuntarily to displace
incumbents. As before, the  Commission chose to aid small businesses
at the auction with  bidding credits, but this time deferred deciding
whether to  stop accepting installment payments. See Amendment of 
Part 90 of the Commission's Rules, Second Report and  Order, 12
F.C.C.R. 19079, pp 276-80 (1997) [Second Report  and Order].


In October, 1997, after this Court denied SMR WON's  motion for a stay,
the Commission conducted an auction for  EA licenses in the upper 200
channels. Nextel purchased 475  of the 525 licenses and 33,640 of the
35,000 channels offered.  See Public Notice, 12 F.C.C.R. 20417 (1997).
The Commis- sion has not yet scheduled an auction for EA licenses in
the  lower 230 channels.


II. Analysis


Insofar as the petitioners challenge the Commission's view  of the
authority delegated to it by statute, this court's review  is governed
by Chevron, U.S.A., Inc. v. NRDC, 467 U.S. 837  (1984). We must first
determine whether the Congress, in  the Communications Act as amended,
unambiguously ad- dressed the "precise question[s] at issue" here. 467
U.S. at  842. If it did not, then the agency's interpretation,
assuming  it is reasonable, must prevail. See id. at 844. Insofar as
the  petitioners attack the Commission's exercise of its statutory 
authority, this court's review is limited to determining wheth- er the
agency's decisions were arbitrary and capricious within  the meaning
of the Administrative Procedure Act, 5 U.S.C.  s 706(2)(A). See Arent
v. Shalala, 70 F.3d 610, 616 (D.C. Cir.  1995). The agency has met
this standard if it "examined the  relevant data and articulated a
satisfactory explanation for its  action." Atlantic Tele-Network, Inc.
v. FCC, 59 F.3d 1384,  1389 (D.C. Cir. 1995).


A."Interim Coverage Requirement" Limited to EA Licen- sees


The Commission allows cellular, PCS, and EA licensees to  provide
service after three years to as little as one-third, and  after five
years to as little as two-thirds, of the population in  the areas
covered by their licenses. Southern contends that  the Commission
construed the Act unreasonably and acted  arbitrarily when it refused
to extend this rule to incumbent  wide-area SMR licensees such as
itself, that is, those that  have "obtained extended implementation
authorizations ...  and who offer real-time, two-way voice service
that is inter- connected with the public switched network." According
to  Southern, which is "seeking authorization to construct hun- dreds
of [additional] sites throughout its licensed geographi- cal area," it
occupies a position in the market indistinguish- able from that of any
wide-area licensee--offering services  over a large geographic area,
competing directly with EA  licensee Nextel as well as with cellular
and PCS licensees,  and using the same technology as do they. Because
Southern  was licensed under the ancien regime for SMR licensees, 


however, it is required to provide service to everyone in its  license
area within two years of licensing. Southern chal- lenges the
Commission to reconcile this disparate treatment  with its statutory
mandate to impose "comparable" require- ments upon "providers of
substantially similar ... services."  Pub. L. No. 103-66, s
6002(d)(3)(B), 107 Stat. 312 (1993).


Faced with this argument on reconsideration, the Commis- sion defended
its decision upon two grounds:


[1] We impose a two year build out period on [incumbent]  site
licensees because, by definition, they are seeking  authority to build
out and operate a particular site. EA  licensees, in contrast, will be
building multiple sites  throughout their licenses' entire
geographical area and  thus require a longer build out period. [2]
Moreover, the  competitive bidding process provides incentives for EA 
licenses to build out quickly, and thus reduces the likeli- hood that
a longer construction period would lead to  spectrum warehousing.


Reconsideration Order at p 81.


Neither explanation bears scrutiny. The Commission ele- vates form over
function when it applies the first reason to an  incumbent site
licensee providing radio telephone service over  a wide area; because
it is licensed for a multitude of "particu- lar site[s]," it too "will
be building sites throughout ... [an]  entire geographic area and thus
require a longer build out  period." Moreover, the Commission ignores
a key difference  in the regulatory regimes it has imposed upon two
"substan- tially similar ... services": An EA licensee will never have
to  provide service to more than two-thirds of its market, while a 
wide-area incumbent offering the same service will be re- quired to
cover its entire service area within two years.  Even if the obstacles
an EA licensee faces in constructing its  system warrant giving it
more time than is allowed to a  comparable SMR licensee, the
Commission has not explained  why the EA licensee should have a
permanent advantage over  incumbent SMR licensees--namely, not having
ever to serve  the unprofitable precincts within its licensed service


The Commission's second rationale proceeds from the  premise that
because an incumbent SMR licensee, unlike an  EA licensee, did not
have to expend a substantial sum to get  its license, the incumbent
has less incentive, in order to  recoup its investment, to put its
spectrum into service quick- ly. In the Commission's terms, the
incumbent is more likely  to "warehouse" its spectrum because it
received its license  free. This is a foolish notion that should not
be entertained  by anyone who has had even a single undergraduate
course in  economics. See Armen A. Alchian & William R. Allen, Ex-
change & Production 222 (3rd ed. 1983) ("[O]nce [an item] is 
acquired, [its cost is] irrelevant to any future decision.");  James
D. Gwartney & Richard L. Stroup, Economics 417-19  (4th ed. 1982) ("If
they are to minimize costs, business  decision-makers must recognize
the irrelevance of sunk  costs."); N. Gregory Mankiw, Principles of
Economics 291  (1997) ("The irrelevance of sunk costs explains how
real  businesses make decisions."); Paul A. Samuelson & William  D.
Nordhaus, Economics 167 (16th ed. 1998) ("One of the most  important
lessons of economics is that you should look at the  marginal costs
and marginal benefits of decisions and ignore  past or sunk costs").
Failing that advantage, a moment's  reflection would bring one to the
realization that the use to  which an asset is put is based not upon
the historical price  paid for it, but upon what it will return to its
owner in the  future. Would anyone be less interested in earning a
return  on money he had inherited than on money he had worked for?  Of
course not! Are radio licensees not as alert as inheritors?  Whether a
license costs millions of dollars or nothing, that is,  absent some
institutional constraint imposed upon EA licen- sees by the
Commission, or lenders, for example--and the  agency alludes to
none--a rational licensee will voluntarily  put its spectrum into
service only when the additional reve- nue it expects to earn from
doing so exceeds the additional  cost it must incur to do so.
Therefore, the Commission  cannot reasonably assert that EA licensees


Because the Commission has failed to articulate a satisfac- tory
explanation for its refusal to extend the Interim Cover-


age Requirement to wide-area SMR licensees, we hold that  its decision
was arbitrary and capricious in that respect. See  Atlantic
Tele-Network, Inc., 59 F.3d at 1389. We shall not  go on, however, to
address the question whether the agency's  interpretation of the
statute to allow such a distinction is  permissible under Chevron: The
Commission did not think  seriously about the question whether
wide-area incumbent  SMR licensees are in fact sufficiently different
from EA,  cellular, and PCS licensees that disparate regulatory treat-
ment is warranted under s 6002(d)(3)(B). We are therefore  reluctant
to render what may be an uninformed application of  the statute to the
facts about these various services. Accord- ingly, we shall remand
this matter for the agency to reconsid- er in the first instance. In
the interim, the Commission shall  not deny Southern the benefit of
the Interim Coverage  Requirement.


B.Authority to Auction EA Licenses


Fresno and SMR WON (hereinafter collectively referred to  as "Fresno")
question the Commission's authority under  s 309(j)(1) to auction EA
licenses in the upper 200 channels.  That section provides that if
"mutually exclusive applications  are accepted for any initial license
... then ... the Commis- sion shall grant the license ... through a
system of competi- tive bidding." 47 U.S.C. s 309(j)(1). Fresno
maintains that  the "common sense" meaning of an "initial license" is
a  license for a new radio service, for an existing service in a 
newly served area, or for previously unused spectrum. It  points out
that many of the auctioned channels were already  licensed to SMR
providers, and that at least some of those  incumbent licensees offer
the same interconnected services as  will the EA licensee that
prevailed in the auction. At least to  that extent, according to
Fresno, no new service is being  licensed, hence, no "initial" license
is involved. In response,  the Commission contends the EA licenses it
auctioned off are  indeed "initial" because they are "first-time
licenses for [EA]  systems and not renewals or modifications of


The statute does not unambiguously resolve "the precise  question at
issue" here, Chevron, 467 U.S. at 842--whether 


the Commission's creation of a new "licensing scheme" gives  it the
authority to grant by auction a license for spectrum  currently being
used by a licensee to provide substantially the  same (in this case,
interconnected) service. To be "initial" in  any meaningful sense, a
newly issued license must differ in  some significant way from the
license it displaces; upon that  the parties agree. According to
Fresno, the difference must  be that the new license covers a new
service or territory or is  for previously unused spectrum. Although a
plausible inter- pretation of the term, this is not the only plausible
one: As  the Commission suggests, nothing in the text of the statute 
forecloses it from considering a license "initial" if it is the first 
awarded for a particular frequency under a new licensing  scheme, that
is, one involving a different set of rights and  obligations for the
licensee. Even if such a license authorizes  no new service and covers
spectrum already in use, it is the  first license for that spectrum
issued under the new regulato- ry regime. Because the critical term of
the statute is there- fore ambiguous, we turn to Chevron step two and
the ques- tion whether the Commission's resolution of that ambiguity
is  reasonable.


Fresno contends that the Commission's interpretation of  "initial
license" is unreasonable, because it removes all limita- tions upon
the agency's authority to allocate licenses by  auction. That,
however, is simply not true: The Commission  acknowledges that it must
have instituted a new regulatory  regime for a new license to be
deemed "initial" and thus  subject to competitive bidding. Here the
Commission has, as  it says, "revis[ed] its frequency allocations and
its licensing  scheme." Fresno insists that the Commission has not
created  a genuinely new regulatory scheme, but that is incorrect,
too.  As noted above, EA licenses cover blocks of spectrum and 
substantial geographic areas, while the previously issued  SMR
licenses are for small groups of channels and individual 
transmitters. Unlike incumbents, moreover, EA licensees  enjoy both
the liberalized build out rule and the power  involuntarily to
relocate other licensees. True it is, as Fresno  points out, that the


these changes in the early 1990s by waiving its prior rules in 
particular SMR license proceedings. See, e.g., FleetCall, 6  F.C.C.R.
1533, p 21 (1991) (waiving build-out rule). That may  show that the
development of the Commission's thinking was  evolutionary rather than
revolutionary; it does not, however,  mean that the EA licensing
regime is merely old wine in a  new vessel. In sum, because an EA
license is substantially  different from an SMR license, the agency
did not act unrea- sonably in treating EA licenses as "initial
license[s]" within  the meaning of s 309(j)(1).


C.Elimination of Installment Payment Plans


Fresno next challenges the Commission's decision to stop  letting small
businesses pay by installment for licenses in the  upper 200 channels
purchased at auction. Fresno contends  that the prior practice is
required by s 309(j)(3)(B), which  says that, in designing an auction,
the agency should seek to  disseminate licenses "among a wide variety
of applicants,  including small businesses." Fresno characterizes the
agen- cy's substitute policy of providing bidding credits for small 
businesses as a "token gesture," the insignificance of which it  says
is demonstrated by Nextel having bought the great  majority of the
licenses offered.


There are two problems with Fresno's position. First,  s 309(j)(3)(B)
requires the agency to consider a variety of  objectives--not only the
promotion of small businesses but  also, among others, "the
development and rapid deployment  of new technologies, products, and
services," "the avoidance  of unjust enrichment," and the "efficient
and intensive use of  the electromagnetic spectrum." 47 U.S.C. s
309(j)(3). When  an agency must balance a number of potentially
conflicting  objectives, which these are, judicial review is limited
to  determining whether the agency's decision reasonably ad- vances at
least one of those objectives and its decisionmaking  process was
regular. See Melcher v. FCC, 134 F.3d 1143,  1154 (D.C. Cir. 1998).
Here, the record demonstrates, the  Commission decided to eliminate
the installment payment  plan after thoroughly considering the
competing statutory  objectives. Having recently encountered severe
problems  created by licensees defaulting on their installment


the Commission reasonably decided to reevaluate its payment  policy.
Because that would take some time, and because  several years had
already passed since the agency had accept- ed any new applications
for 800 MHz SMR licenses, it con- cluded that a system of bidding
credits would strike the best  balance between solicitude for small
businesses and prompt  and effective use of the spectrum. See
Reconsideration Or- der at pp 130-32. Its decision, therefore, clearly
meets the  Melcher standard.


Second, the Commission did not simply sacrifice the goal of  promoting
small businesses in favor of other statutory objec- tives; rather, it
chose one method of achieving that goal over  another. While it is
true, as Fresno emphasizes, that the  method chosen did not turn out
to be successful at allocating  licenses "among a wide variety of
applicants," an agency's  predictive judgment regarding a matter
within its sphere of  expertise is entitled to "particularly
deferential" review.  Milk Indus. Found. v. Glickman, 132 F.3d 1467,
1478 (D.C.  Cir. 1998). Fresno makes no showing that the Commission's 
decision was unreasonable ex ante; rather, its argument is  that the
Commission's belief in the efficacy of bidding credits  appears ex
post to have been mistaken. Because this argu- ment is not a challenge
to the reasonableness of the agency's  decision on the basis of the
record then before it, Fresno's  claim must fail.*


D."Modification" of Incumbent Licensee Rights


Finally, Fresno contends that the licenses of incumbent  SMR providers
in the upper 200 channels will be "modified"  to the extent they are
forced to relocate to the lower 230  channels, and that s 316 of the
Act therefore required the 




__________

n * Fresno also contends that the agency failed to consider the 
interests of businesses owned by women and members of minority 
groups, as is also required by s 309(j)(3)(B). Because Fresno  makes
no showing, however, that any of its members is owned by a  woman or a
member of a minority group, it lacks standing to raise  this argument.
See Lujan v. Defenders of Wildlife, 504 U.S. 555,  560-61 and n.1
(1992) (to have standing, plaintiff must have suffered  a
"particularized" injury, meaning that "the injury must affect the 
plaintiff in a personal and individual way").


agency to grant each incumbent an evidentiary hearing before  awarding
a mutually exclusive EA license. See 47 U.S.C.  s 316(a)(1) (no "order
of modification shall become final until  the holder of the license
... [has been] given reasonable  opportunity ... to protest"). We do
not address the merits  of this argument, however, because Fresno
failed to raise it  before the Commission. See 47 U.S.C. s 405(a)
("filing of a  petition for reconsideration [is] ... a condition
precedent to  judicial review ... where the party seeking such review
...  relies on questions of fact or law upon which the Commission  ...
has been afforded no opportunity to pass"). A number of  parties did
complain to the Commission that the agency's  proposed EA licensing
rules were, for a variety of reasons,  unfair to incumbents, but none
of their objections mentioned  s 316 even in passing, nor did any
party request an evidentia- ry hearing. Hence, we cannot say that the
Commission was  given a reasonable "opportunity to pass" upon the
argument  Fresno now makes. See Bartholdi Cable Co. v. FCC, 114  F.3d
274, 279 (D.C. Cir. 1997).


III. Summary and Conclusion


First, the Commission failed reasonably to explain its deci- sion to
apply different build out requirements to EA licensees  and to
incumbent wide-area SMR licensees, such as Southern,  which provide
substantially similar services. Accordingly, the  Interim Coverage
Requirement for EA licensees must be  remanded to the agency for
further consideration in conformi- ty with Public Law 103-66.


Second, the Commission reasonably concluded that it had  the statutory
authority to grant EA licenses by competitive  bidding and that the
auction rules it chose would advance the  interests of small business
bidders. We do not consider  Fresno's claim to an evidentiary hearing
under s 316 because  it was not raised before the agency. We have
considered and  rejected the petitioners' other arguments, which do
not merit  treatment in a published opinion.


Judgment Accordingly.