Metro PCS 2008 Annual Report Download - page 27

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we believe that the indirect ownership of our equity by foreign entities is below the benchmarks established by the
Communications Act. If we were to have foreign ownership in excess of the limits, we have the right to acquire that
portion of the foreign investment which places us over the foreign ownership restriction.
Designated Entity Requirements
The FCC has established rules that are designed to promote the granting of spectrum licenses to small and very
small businesses, entrepreneurs and other DEs. Some licenses, called closed licenses, have been set aside solely for
DEs to acquire at auction. DEs also can qualify for bidding discounts of varying amounts (e.g., 15% or 25%) when
acquiring licenses available to all parties, called open licenses, at auction. We are an investor in Royal Street
Communications, which is a very small business DE that must meet and continue to abide by the FCC’s DE
requirements until at least December 2010.
Among other requirements, the FCC DE rules create a control test that obligates the eligible small or very small
business members of a DE licensee to maintain de facto (actual) and de jure (legal) control of the business and
license. The FCC rules provide that if a license is transferred to a non-eligible entity, an entity which qualifies for a
lesser credit on open licenses, or if the existing licensee ceases to be qualified as a DE, the licensee may lose all
closed licenses which are not constructed, and may be required to refund to the FCC some or all of the bidding
credit received for all open licenses, based on a five-year straight-line discount repayment schedule commencing
from the grant date. For example, in Auction 58, Royal Street Communications received a bidding credit equal to
approximately $94 million relating to open licenses it acquired as result of that auction. If Royal Street were found
to no longer qualify as a DE during the initial five-year term of its licenses, it would be required to repay a portion
of the bidding credit using the five-year straight-line repayment schedule from December 2005. Moreover, any
closed licenses which are transferred by Royal Street, or if Royal Street is found to no longer qualify as a DE, prior
to the five-year anniversary of their initial grant, or December 2010, also may be subject to an unjust enrichment
payment. Revocation also could occur if any license is not constructed on a timely basis or not constructed prior to
Royal Street no longer qualifying as a DE. All of Royal Street’s licenses are closed licenses except for its Los
Angeles and Gainesville basic trading area licenses. Royal Street already has constructed the systems authorized by
its open license for Los Angeles license and its closed licenses in the Orlando, Lakeland-Winter Haven, and
Melbourne-Titusville basic trading areas.
In 2006, the FCC adopted new DE requirements that apply to all licenses initially granted after April 25, 2006, or
New DE Requirements. First, the FCC found that an entity that enters into an impermissible material relationship,
which includes any arrangement whereby a DE leases or resells more than fifty percent of the capacity of its
spectrum or network to third parties, will be ineligible for an award of DE benefits and subject to unjust enrichment
payments on a license-by-license basis. Second, the FCC found that any entity which has a spectrum leasing or
resale arrangement (including wholesale arrangements) with an applicant or licensee for more than 25% of the
applicant’s total spectrum capacity on a license-by-license basis will be considered to have an attributable interest in
the applicant or licensee. Royal Street’s existing relationships with us are grandfathered and Royal Street is not
subject to the New DE Requirements with respect to its existing licenses which were granted before April 25, 2006.
However, the New DE Requirements will not permit Royal Street to enter into the same relationship it currently has
with us for any future FCC auctions and receive DE benefits, including bidding credits. In addition, Royal Street
will not be able to acquire any additional DE licenses in the future, resell services to us on those licenses on the
same basis as the existing arrangements, or materially change its existing arrangements with us, without making
itself ineligible for DE benefits.
Further, the FCC has adopted rules requiring a DE to seek approval for any change in circumstances that may
affect its ongoing eligibility, such as entry into an impermissible material relationship, even if the event would not
have triggered a reporting requirement under the FCC’s existing rules. In connection with this rule change, the FCC
now requires DEs to file annual reports with the FCC listing and summarizing all agreements and arrangements that
relate to eligibility for DE benefits. Royal Street has filed all of its required annual reports with the FCC. The FCC
also indicated that it will step up its audit program of DEs.
Several interested parties have filed appeals of the New DE Requirements. These appeals are ongoing. The relief
sought by the petitioners in their underlying appeals includes overturning the results of Auctions 66 (AWS-1) and 73
(700 MHz). If the petitioners are ultimately successful in obtaining this relief, any licenses granted to us as a result
of Auction 66 and/or 73 may be revoked. Our payments to the FCC for the revoked licenses would be refunded, but
without interest. If our licenses are revoked we will have been required to pay interest to our lenders on the money
paid to the FCC for the AWS-1 and 700 MHz licenses and we will have incurred clearing, construction, and other