STATEMENT OF TIMOTHY M. DONAHUE PRESIDENT, CHIEF EXECUTIVE OFFICER NEXTEL COMMUNICATIONS, INC.

The Omnibus Budget Reconciliation Act of 1993 ("OBRA ‘93") directed the Federal Communications Commission to conduct spectrum auctions as a means of allocating radio spectrum for commercial mobile radio communications services ("CMRS"). When the Commission adopted auction rules mandated by OBRA ‘93, it set-aside a portion of CMRS spectrum for small businesses. These were the so-called C and F Blocks. When the Commission developed C and F auction rules in 1994, it balanced a conflicting set of Congressional goals: prompt deployment of new technologies; service to rural areas; recovering a portion of the value of the spectrum; and making licenses available to a wide variety of applicants, including small businesses. The rules put substantial weight on providing opportunities for small businesses (or "designated entities"), in part, because the Commission concluded that smaller companies could succeed in the broadband CMRS marketplace.

Even before the C and F block licenses were awarded, however, market conditions changed so significantly that the Commission's hopes could not be realized. Rather than producing a vigorous marketplace of local and niche services, the auctions resulted in a handful of designated entities obtaining the vast majority of C and F Block licenses. The auction winners could not, however, translate their plans into operations, in large part because they had overextended themselves in their efforts to obtain sufficient spectrum. Such aggressive bidding strategies eliminated the true small businesses. Many C Block licensees have declared bankruptcy, and most of the spectrum remains mired in seemingly endless bankruptcy litigation. Today, only a few designated entities operate in a tiny fraction of C and F Block spectrum, and the vast majority of this spectrum lies fallow. Rural America remains particularly underserved.

Based upon a December, 1999 Second Circuit Court of Appeals decision in the NextWave bankruptcy case, the Commission has announced the cancellation of NextWave’s licenses as a result of NextWave's failure to meet the full and timely payment conditions upon which those licenses were awarded. The Commission now is reauctioning much of the C and F Block spectrum. As you are aware, Nextel is interested in acquiring this spectrum through a competitive bidding process. Nextel has sought an opportunity to participate in this process since last August. Prior to commencing the reauction, the Commission once again must balance the Congress' goals for spectrum auctions. In designing these auctions, the Commission should focus on the goals that were not met by earlier C and F Block auctions -- prompt deployment of service and service to all, including those in rural and underserved areas. These goals are particularly important because the failures of C and F Block licensees have deprived consumers, particularly rural consumers, of competitive choices that should have become available years ago.

To achieve these goals, the Commission must craft a new set of eligibility and bidding rules for the C and F Block spectrum now scheduled for auction in July, 2000. Specifically, the Commission should adopt rules as follows:

C The designated entity set-aside rules would not apply to the reauction. Qualified, bona fide designated entities would be entitled to participate in the reauction and should remain eligible for bidding credits similar to those adopted for other auctions.

C One block of spectrum would be auctioned at the end of May 2000, on a bulk bidding package basis. This block would consist of (i) 20 MHZ from each of the 30 MHZ C Block licenses being reauctioned; and (ii) all 15 MHZ licenses being reauctioned. The successful bidder in this auction would be required to begin service in each BTA by three years from the date of license.

C The remaining F Block spectrum, consisting of 93 new 10 MHZ licenses from each of the 30 MHZ C Block licenses and all of the other 10 MHZ licenses, would be auctioned beginning July 26, 2000. There would be separate bidding for each license.

These rules balance the Congressionally mandated goals while recognizing the dramatic evolution of the wireless marketplace since 1994. Opening the auctions to all qualified bidders and imposing accelerated build-out requirements for the bulk bid licenses will ensure that these licenses do not lie fallow. Accelerated build-out requirements for the bulk bid licenses will ensure that service is provided to many rural BTAs that do not now have PCS service. The bulk bid element of the auction will give the successful bidder the nationwide footprint necessary to compete effectively against mature wireless providers. At the same time, the proposal will give designated entities significant opportunities by providing them with bidding credits and auctioning licenses at the BTA level. Thus, the proposal will meet the Congressional goals that were not served by the earlier C and F Block auction winners, while preserving the ability of designated entities to participate meaningfully in the auction process to obtain spectrum and provide innovative services.

This Committee and the Congress should continue to impress upon all parties the need to resolve fairly the existing bankruptcy cases so that spectrum that has lain fallow too long can be put to use. Many areas of the Country, particularly rural areas, are still waiting for competitive services that urban areas now take for granted. As long as litigation over these licenses continues, new competitive services will be denied to those who need them most, and the Congressional policies enumerated in OBRA ‘93 will be unfulfilled. Most importantly, Congress has every right to expect that auction winners will timely and fully meet their financial commitments to the United States for use of a scarce public resource.

Introduction

Mr. Chairman and Members of the Committee, thank you for the opportunity to appear before you today to discuss Federal Communications Commission ("Commission") spectrum auctions. At the outset, Mr. Chairman, I would also like to take the opportunity to thank you and the other Members of this Committee for doing the hard, mostly thankless, work over many years that has directly resulted in the unprecedented Federal budget surpluses that we are now enjoying. We have all benefited greatly from your leadership and perseverance.

I am Timothy M. Donahue, President and Chief Executive Officer of Nextel Communications, Inc. Nextel is a leading international wireless communications company with over 4 million U.S. customers. In the past year alone, Nextel has added over 1.6 million new U.S. customers, and we are currently adding customers at the rate of approximately 450,000 each quarter. Today, we operate in 92 of the top 100 metropolitan areas in the United States and, together with affiliates, provide service in 10 of the world’s largest 25 cities.

Nextel’s mobile radio roots are in the Specialized Mobile Radio ("SMR") industry. Prior to the creation of digital PCS, Nextel proposed SMR rule waivers to allow it to introduce advanced switched digital services. We responded by building a system to provide the first real competition to the cellular duopoly then existing in each market. We also acquired additional spectrum in private transactions to serve our customers. Nextel has also participated in the Commission’s wide area SMR auctions to gain a sufficient footprint to provide its enhanced digital services. I am proud to say that Nextel was an early proponent of spectrum auctions and enthusiastically supported the spectrum auction provisions of the Omnibus Budget Reconciliation Act of 1993, which authorized radio spectrum auctions.

Nextel strongly believes that auctions are the fairest, most efficient way of allocating scarce radio spectrum. And, for the most part, we believe the FCC’s spectrum auctions have been successful. For instance, the A and B Block PCS auction generated approximately $7.7 billion dollars in revenue for the Federal government and A and B Block PCS systems and many D and E Block systems have been deployed rapidly. As a result, prices for wireless service have decreased dramatically, new services, service plans and features are being offered and tens of millions of wireless customers, new and old, have benefited. The major exception, of course, has been the well-publicized problems associated with the Commission’s C and F Block PCS auctions, which I will discuss later.

The mobile communications industry is growing rapidly. Moreover, the pace of change within the industry is accelerating. Customers increasingly are demanding wider coverage areas for their mobile phones, the elimination of roaming fees, and more certainty in the cost of their service. Customers also are demanding that their phones provide them with more than just voice communications capability.

Nextel and other providers have responded to these demands by increasing coverage areas, eliminating roaming fees, providing single rate pricing plans for "all the minutes you use," and by introducing telephones with ever-expanding capabilities, including text-numeric paging, push- to-talk direct connect, and, most recently, Internet access. For many business people, the mobile phone has essentially become their mobile office and Nextel and other providers must respond to this demand if we are to be successful.

Customer demand for efficient/useful wireless services is driving all providers to regional or national service offerings featuring "all you can use" buckets of local and long distance minutes at reduced charges. Today’s carriers either must effectively have nationwide coverage or arrangements that replicate, for themselves and their customers, the economics of nationwide coverage.

The trends in the industry, driven by customer demand, have had a direct effect on the Commissions spectrum auctions, particularly the ill-fated C and F Block auctions. The Commission promulgated its original Personal Communications Services ("PCS") auction rules in 1994, when the wireless mobile industry was characterized by a duopoly of cellular providers in each market providing analog mobile voice communications services. To eliminate the cellular duopoly and introduce enhanced digital wireless services, the Commission concluded that six blocks of PCS spectrum would be made available for new entrants through competitive bidding, as mandated by Congress. Of these, Blocks C and F-- 40 MHZ or one-third of the 120 MHZ assigned to licensed PCS operations -- were set-aside for small businesses, or "designated entities," required to have gross revenues and total assets below certain levels and to comply with certain corporate control requirements. The Commission also decided to auction a C and F Block PCS license in each of 493 BTAs and to limit the total number of licenses that any single designated entity could obtain to facilitate distribution of licenses among a wide variety of applicants.

When the Commission adopted the C and F Block auction rules in 1994, it balanced a conflicting set of Congressional goals: prompt deployment of new technologies; service to rural areas; recovering a portion of the value of the spectrum for the taxpayer; and making licenses available to small businesses (designated entities). The set-aside rules put the greatest weight on providing opportunities to designated entities, in part because the Commission concluded that smaller companies could succeed in the CMRS marketplace.

The Commission premised its actions establishing the C and F Block designated entity set-aside upon two fundamental assumptions. First, the Commission assumed that designated entities would obtain licenses and implement PCS systems in smaller geographic markets. Second, given the early stage of the PCS industry’s development and the assertions in the record by interested small businesses, the Commission assumed that small businesses would be able to implement viable niche services in these more limited geographic markets and compete effectively with large regional and national wireless services providers by differentiating their offerings and forming cooperatives as necessary to counter any economies of scale realized by larger competitors. In the intervening years, however, this prediction did not prove true.

Although the Commission promulgated its PCS auction rules in July 1994, the C Block PCS auction was delayed for a variety of reasons and did not commence until December 1995. In addition, the C Block auction was quite lengthy and did not conclude until May 1996. The idea that there would be many designated entity licensees successfully operating small regional PCS systems was shattered by the emergence of several large designated entities that had amassed significant license holdings. These so-called small businesses eliminated most of the real designated entities through their bidding strategies.

Simultaneously, dramatic structural changes were taking place in the CMRS industry. Significant mergers and acquisitions occurred. Many C Block licensees found themselves unable, or unwilling, to even pay the interest on the ten (10) year financing on the large sums bid and owed for the licenses. Less than a year after the C Block auction concluded, the Wireless Telecommunications Bureau suspended payment obligations for C Block Licensees. After considering several industry proposals on how to restructure C and F Block financial obligations, the Commission concluded that any outright forgiveness of the debt would undermine the integrity of the Commission’s rules and would give an unfair advantage to those who bid excessively compared with those who withdrew when the bidding began to exceed their financial resources.

The major C Block industry players quickly responded to the Commission’s restructuring options: They declared bankruptcy. At present, at least eight C and F Block licensees holding more than 190 licenses, including the largest C Block license holder, NextWave Personal Communications, Inc. ("NextWave"), have declared bankruptcy. These bankruptcy cases have tied up the licenses in lengthy and complex proceedings and have frozen most build-out activity in the C Block. Only a few of the nearly 1,000 licenses acquired in the C and F Block auctions have been constructed and are in commercial operation; the vast majority remain unbuilt. As of January 3, 2000, only 21 C block and 4 F Block licenses are constructed and providing services over some portions of their markets.

As the Commission’s annual report to Congress shows, the C and F Block PCS licenses, nearly one-third of all new competitive CMRS spectrum allocated since the cellular duopoly days, have not been used to provide competition in rural and underserved areas. Moreover, these carriers did not follow a niche market strategy, as the Commission anticipated when it established the designated entity program. Rather, C and F Block licensees chased the same urban customers who now already receive service from up to five different wireless competitors. The lack of carrier interest in rural and underserved markets is highlighted by the fact that 45 of the 154 total licenses available for reauction went unsold in the March, 1999 reauction. These 45 unsold licenses primarily cover small populations in rural areas.

It is evident that the Commission’s designated entity set-aside policy for the C and F Block licenses, while well-intentioned, did not effectively serve any of the originally intended goals. It is obvious that small, start-up entities with hundreds of millions, if not billions, of dollars in debt face significant challenges in competitive markets in which some of the nation’s largest communications firms operate. Furthermore, an entity that believes itself capable of bidding and timely making license payments totaling billions of dollars is not a small business by any stretch of the definition. Thus, despite the Commission’s best intentions in devising a designated entity program that would benefit small businesses, it is evident that many participants in the first C Block auction had no intention of meeting the spirit of the Commission’s small business rules.

In addition to the vast majority of the licenses remaining unused, because these licensees have filed for bankruptcy, the Commission and the Federal government have not been paid the money owed for these licenses. While the Congressional Budget office and OMB scored the C Block auction at $500,000,000.00, over $8 billion was bid by the bankrupt licensees alone.

There is every reason to believe that the spectrum the Commission recently designated for reauction is worth far more than was bid during the C Block auction. For example, it is a matter of public record that Nextel was prepared to pay $8.3 billion for the former NextWave licenses. Our recent proposal to the Commission urges a minimum opening bid of $2 billion for a portion of available spectrum in an open auction. Other large companies such as SBC have expressed an interest in NextWave's licenses. These expressions of interest and private valuations of C Block spectrum worth in today's wireless market deserve this Committee's attention, as they suggest the government can reasonably expect to garner more revenue in an open eligibility reauction of the licenses than the revenue that would have been received if full and timely payment of bid amounts had been made in the initial C Block auction.

Following a late December Second Circuit Court of Appeals decision, the Commission has announced the cancellation of the NextWave licenses for failure to meet the full and timely payment conditions upon which these licenses were awarded. This decision has been challenged by NextWave in bankruptcy court and is likely headed to further appeals in the Federal courts. The Commission now is proposing to reauction in July much of the C and F Block spectrum that has reverted to the Commission because of automatic license cancellations, or voluntary license returns, or that went unsold in previous auctions. Virtually none of the licenses identified by the Commission for the July reauction has ever been used to provide service. Consequently, the Commission’s primary objective in this reauction should be to speed service to the public in a manner that enhances the provision of advanced wireless services and further stimulates competition in both rural and urban areas.

On January 31st, Nextel formally proposed to the Commission a set of eligibility and bidding rules for the C and F Block spectrum auction. Nextel has proposed the following:

! The designated entity eligibility rules should not apply to the reauction. However, designated entities would be eligible for bidding credits similar to those adopted by the Commission for other auctions.

! One block of spectrum would be auctioned beginning at the end of May, 2000, on a bulk bidding package basis. This block would consist of 20 MHZ from each of the 30 MHZ C Block licenses being reauctioned and all 15 MHZ licenses being reauctioned. In order to ensure expeditious service, the successful bidder in this auction would be required to begin service by three years from the date of license, instead of the current 5 year build-out requirement.

! The remaining spectrum, consisting of 10 MHZ from each 30 MHZ license and all of the 10 MHZ licenses, would be auctioned beginning July 26, 2000. There would be separate bidding for each license.

These proposals balance the Congressionally-mandated goals while recognizing the evolution of the wireless marketplace since 1994. Opening the auctions to all qualified bidders and imposing accelerated build-out requirements for the bulk bid licenses will ensure that these licenses do not lie fallow. The bulk bid element of the auction will give the successful bidder the nationwide footprint necessary to compete effectively against mature wireless providers like AT&T Wireless. At the same time, the proposal will give designated entities significant opportunities by providing them with bidding credits and auctioning most licenses at the BTA level. Thus, the Nextel proposal will meet the Congressional goals that were not served by the original C and F Block auctions while preserving the ability of designated entities to participate meaningfully in the process. We believe these proposals are consistent with Commission policies and procedures and with the Congressional goal of ensuring that the American people, including those living in rural areas, benefit from prompt deployment of the advanced services that this spectrum will support.

This Committee long has had an interest in ensuring that the Commission’s spectrum auction policies benefit the public through speedy introduction of new telecommunications services to all areas of the Country, while recovering for the taxpayer a portion of the value of the spectrum being used. We appreciate that continuing interest and look forward to working with you to help ensure that these multiple Congressional goals are realized.

Nextel has had an interest in participating in a competitive bidding process for the Next Wave licenses since last August. Our interest stems from the fact that among regional and national wireless carriers, Nextel has less spectrum than any of our competitors. While we have sufficient spectrum for our current business needs, future services increasingly will depend on having additional spectrum. Nextel has worked with the Commission and the Congress, and we have tried to work constructively with NextWave and its creditors, to help devise a fair resolution of the ongoing NextWave bankruptcy litigation. A key component of any resolution, we believe, must envision an open bidding process for these licenses.

This Committee and the Congress should continue to impress upon all parties the need to resolve fairly these cases so that spectrum that has laid fallow too long can be put to use. Many areas of the Country, particularly rural areas, are still waiting for competitive services that urban areas now take for granted. As long as litigation over these licenses continues, new competitive services will be denied to those who need them most, and the Congressional policies enumerated in OBRA 93 will be unfulfilled.

Again, Mr. Chairman, thank you for your personal interest and leadership on this important issue. I would be pleased to try to answer any questions the Committee might have.