Finding substance in the FCC's policy of "substantial service".

• Author: Prime, Jennifer

1. INTRODUCTION 398 II. THE PROCESS OF LICENSE RENEWAL 399 III. "SUBSTANTIAL SERVICE" 401 A. History and Origin 401 B. "Substantial Service" as Applied to Commercial Radio Services 404 IV. FLEXIBLE USE: ALLOWING THE MARKET TO DETERMINE THE BEST USE FOR SPECTRUM 407 A. The FCC's Standard of Review for "Substantial Service" Cases 407 B. Examples of FCC Findings of "Substantial Service" 408 1. Serving Underrepresented Customers 408 2. Safe Harbor 409 3. A Combination of Factors 410 V. THE PROBLEMS WITH "SUBSTANTIAL SERVICE" AND POSSIBLE SOLUTIONS 411 A. Why This Policy May Be Inconsistent With the Communications Act 411 B. Why This Policy May Be Inconsistent With the Administrative Procedures Act 412 C. Solutions 414 VI. CONCLUSION 414 I. INTRODUCTION

   What is "service which is sound, favorable, and substantially above a level of mediocre service which just might minimally warrant renewal"? (1) It is the Federal Communication Commission's ("FCC" or the "Commission") definition of "substantial service." This Note attempts to make sense of this vaguely articulated, but significant, concept. In recent years, the Commission has aggressively moved to promote the policy of flexible use of the electromagnetic spectrum. In conjunction with this policy, the Commission has used the "substantial service" construct in a variety of contexts, including the auction of commercial radio services.

   An FCC license is a valuable asset, but it exists only for a limited duration. Therefore, obtaining a license renewal is vital to a licensee, especially one who has participated in an auction and made substantial investments in order to obtain the rights the license confers. The economic incentive in obtaining a renewal encourages license holders to do everything they can to ensure that they retain their licenses. This Note describes how a licensee can obtain a renewal expectation for commercial radio services and focuses in depth on the "substantial service" requirement and how this requirement is linked to the FCC's policy of flexible use.

   The term "substantial service" has become a common fixture in FCC renewal requirements and is identified as an important factor in the promotion of flexible spectrum use. (2) This Note addresses the meaning of flexible use and the potential problems that arise when "substantial service" requirements are used to promote flexible use. The policy of flexible use is centered on the idea of allowing licensees, rather than the FCC, to decide how to use the spectrum they are allocated. One of the most compelling arguments for this policy is that the market drives spectrum to its highest and best use. This Note examines the FCC's current practice of using "substantial service" and explores whether this policy achieves a market-based approach to regulation.

   This Note identifies two potential questions that arise when "substantial service" is combined with flexible use: First, is "substantial service," as applied, too ambiguous for licensees to know with certainty that their licenses will be renewed? This question is particularly important because of the substantial investment licensees make in acquiring and building out their licenses. One alternative approach is to return to specifically announced construction benchmarks. These are set requirements that a licensee must meet to maintain its license, such as service to a specific geographic area or service to a specified percentage of the population. Second, can "substantial service" be validly applied under current law? For example, is "substantial service" consistent with the goals of the Communications Act of 1934, as amended (the "Act"), (3) or, if a licensee is denied a renewal because it did not meet the "substantial service" requirement, was it provided notice as required by the Administrative Procedure Act? These potential problems may best be solved legislatively by eliminating the necessity that a licensee must demonstrate compliance with service requirements.

2. THE PROCESS OF LICENSE RENEWAL

   The Act requires the FCC to allocate spectrum use by grant of license. These licenses are issued for a limited duration, and "no such license shall be construed to create any right, beyond the terms, conditions, and periods of the license." (4) In the past, the FCC's process of granting initial licenses included comparative hearings and lotteries. (5) Currently, the FCC grants many initial licenses by auction. In an auction, potential licensees bid against each other for the license. The auction system is based on the idea that the person willing to spend the most money on the license will use the license productively.

   In contrast to initial licensing, there is a different set of objectives to be considered in renewal licensing. These objectives include encouraging licensees to make effective use of the spectrum and providing licensees with a way to have some certainty that their licenses will be renewed. Further, an initial suitability screening of the licensee is not required in renewal proceedings because this task was completed when the initial license was granted.

   Performance requirements are significant components of the license process. These are specific obligations imposed on licensees by the FCC. One such performance requirement is a construction benchmark, which requires a licensee to meet specified build-out requirements. "Substantial service" is another type of performance requirement.

   As applied by the FCC, construction benchmarks can either call for the building of a communications infrastructure or require service to a specified percentage of the population. (6) In the context of commercial radio services, the Commission has retreated from the traditional numerical and geographic benchmarks and has increasingly embraced "substantial service" as an alternative means of meeting performance requirements. (7) In contrast to clear standards set forth in construction benchmarks, a "substantial service" requirement offers this guidance: "service which is sound, favorable, and substantially above a level of mediocre service which just might minimally warrant a renewal." (8)

   In conjunction with "substantial service" the Commission has introduced the concept of "safe harbors." Safe harbors are determined by the FCC and are similar to construction benchmarks. They mirror specific build-out requirements insofar that they provide licensees with certainty that the licensee has met the performance requirement.

   Unlike construction benchmarks, however, a licensee can choose to follow or not follow the safe harbor example as a means of meeting a performance requirement.

   Performance requirements are particularly relevant in the renewal process. To provide licensees with renewal security, the FCC has established a process for reviewing renewal applicants' past performance. (9) The factor that is considered "most important" in a comparative renewal proceeding is a renewal expectancy. (10) Obtaining a renewal expectancy allows a licensee to better demonstrate that it should be granted continued use of the spectrum. Therefore, a renewal expectancy is vital to a licensee.

   The FCC has used performance requirements to determine if a renewal expectancy is warranted. To obtain a renewal expectancy, the licensee must demonstrate that it has provided service which fulfills the performance requirement, has substantially complied with the applicable FCC rules and polices, and has substantially acted in compliance with the Act. (11) To make this showing, the licensee must submit documents explaining why renewal expectancy should be granted. (12) The following are examples, from the cellular service rules, of the types of descriptions and records that, at a minimum, the licensee must provide: (1) an assessment of the geographic coverage and the amount of people served, (2) a description of the its expansion record, (3) the amount of money invested in its service network, (4) a copy of any FCC orders that indicate that it violated the Act or FCC rules or policies. (13)

   There are other aspects of licensing for which performance requirements are relevant. For example, a licensee could lose its license in the middle of a license term for failing to comply with a construction benchmark. In addition, Section 309(j) of the Act requires the Commission to set certain performance requirements for commercial radio licenses granted by auction. This Note focuses on commercial radio services, which are generally subject to the 309(j) requirements. For these services, the Commission is increasingly using "substantial service" to satisfy the performance requirement. Because the meaning of "substantial service" is not clear, but is so vital in the license process, it is insightful to examine the history of how and in what contexts the FCC has used this term.

3. "SUBSTANTIAL SERVICE"

   1. History and Origin

      The term "substantial service" has been used in many contexts and in regard to many different types of licenses. In 1933, the term was used to describe the type of service a radio licensee offered to the public. (14) More recently, in the context of comparative hearings for broadcast licenses, the FCC used the term "substantial service" to describe performance by a licensee that would be counted in their favor during a comparative hearing renewal procedure. (15) In its most recent reincarnation, "substantial service" is being used as a performance requirement in many commercial radio services.

      The origins of the current definition can be traced to disputes regarding fairness issues in the comparative hearing process for broadcast licensees. In Citizens Communication Center v. FCC, (16) the Citizens Communication Center and other parties challenged the process of favoring renewal applicants over new applicants. The D.C. Circuit determined that past performance could be used as a positive factor in favor of the incumbent licensee. (17) The FCC used the term "substantial service" to...