Commission tunes up its channel-sharing rules in advance of the incentive auction, with more to come.

As the incentive auction approaches – now supposedly less than a year away – the FCC continues to fine-tune various components of the sprawling auction/repack process. Most recently the Commission has turned its attention to channel sharing.

Channel sharing, of course, is one way in which the Commission hopes to encourage TV licensees to give up their current channels for sale in the auction. The idea is that any licensee willing to give up its channel but unwilling to leave the business entirely would simply share a channel with another station, thus freeing up its original channel for re-purposing. It’s as if your neighbor down the street agreed to vacate her one-acre lot with a two-story house and move into the second story of your two-story house on your one-acre lot, making the neighbor’s original property available for that nice mobile broadband family to move into. Under the Commission’s sharing approach, each sharer gets its own license and is independently responsible to the FCC for its actions, but all share a common transmitter and antenna.

The rules as initially adopted were somewhat restrictive in a number of important respects. But now, in response to petitions for reconsideration, the FCC has relaxed some of its earlier restrictions. Additionally, it has requested comments on a number of proposals for further relief.

Post-auction Sharing Agreements Permitted, With a Catch or Two.Originally, only channel-sharing agreements (CSAs) entered into prior to the incentive auction – and submitted to the Commission with the stations’ pre-auction application – would be recognized. That has changed. The Commission will now permit stations to make their deals any time up to the deadline by which pre-auction CSAs must be implemented, i.e., three months after the auction. In other words, you can enter the auction declaring your intent to share without knowing who your sharing partner will be. And if the FCC eventually adopts further proposals currently on the table, new sharing deals may be allowed any time in the future.

Sounds good? Beware of the fine print.

First, in order to take advantage of this option, a station will have to specify in its pre-auction application that it intends to channel-share. This won’t mean that station will eventually have to enter into a CSA, although if it doesn’t find a partner after the auction, it won’t be able to keep its old license and will end up with no license (because its old channel will have been disposed of in the auction). But if the pre-auction application does not include an expression of intent, the station will not be able to avail itself of a “first generation” post-auction CSA. (“First generation” CSAs are those in place at the completion of the auction process. “Second generation” CSAs are those which may be entered into later down the line, outside of the incentive auction context. See below for more discussion of those.)

Second, would-be sharers without a pre-auction CSA in place will be subject to the auction rules forbidding any communication or collaboration about a licensee’s auction strategy prior to and during the auction. Yes, such communication/collaboration will be permitted between or among sharing stations that have identified themselves (and submitted their CSAs) in their pre-auction applications. But that exception won’t apply to stations that enter the auction with no CSA in place. That means that parties entering the auction with the intent to share but without a pre-auction deal signed, sealed and delivered to the FCC won’t even be able to discuss possible deals, much negotiate them, during the auction.

On top of that, would-be sharers without a pre-auction CSA in place will in any event have to sign and implement their post-auction CSAs by the time that they are required to relinquish their channel, which will be only three months after the auction. One petitioner had argued that stations turning in their licenses should have 12 months in which to find an alternate channel to share, since the Communications Act ordinarily permits stations to remain off-the-air for up to 12 months. Nope, said the FCC, the 12-month provision applies only to stations with licenses. When an auction participant turns in its license, by definition it ceases to have a license and the 12-month option is no longer available. Plus, limiting the post-auction CSA options reduces interruption of service to the public and should “smooth the MVPD’s post-auction transition process”. And heads up: the FCC will not find and assign a sharing partner and will not guarantee that any station rolling the dice in this way will be able to find a willing sharer by the tight deadline.

CSA Limitations on Assignment of Shared Spectrum. Another aspect of the initial rules that distressed potential sharers was the FCC’s view that because each sharer’s license will be completely independent, that license could be sold at will (subject to the usual FCC approval, of course). That meant that one sharing licensee could opt to sell its piece of a channel to a third-party who might be a total stranger to the other sharing licensee. The idea of having to share with a stranger was distasteful to a lot of licensees, who argued that CSAs should be allowed to provide that non-withdrawing shares have the right to acquire a withdrawing sharer’s interest. Initially the FCC nixed this approach, saying that such a provision would constitute an unlawful right of reversion in favor of the survivor. But the FCC has changed its mind. OK, the FCC now says, we’ll let you off the hook: Sharing parties may agree on any provisions they like for disposition of the rights of a withdrawing party, including allowing the remaining party to resume use of the entire channel.

This alternative does pose its own complications, though. If a channel-sharing agreement breaks up and the full channel goes back to one of the parties, that will reduce the number of stations in the market by one, which could in turn affect the relevant multiple ownership limitations of that market. While existing ownership combinations will be grandfathered, creation of any new duopoly might be prohibited. Yes, the FCC says, that’s the way it is: multiple and cross-ownership rules still apply, and if loss of a sharer blocks a planned transaction, so be it.

On a related note, the Commission has also decided to let channel sharers agree among themselves what will happen in the event that one of the sharers loses its license by, e.g., by revocation or even voluntary cancellation. Initially the FCC had taken the position that, if one sharer’s license was revoked or otherwise terminated, that license – i.e., the right to share the use of the particular channel – would automatically go back to the FCC, which could then grant the right to some new applicant. But some commenters objected to the notion that the Commission might become a matchmaker forcing unfamiliar sharers into a shotgun marriage of sorts. On further reflection, the Commission has agreed, and will allow sharers to address this potential circumstance in their CSAs.

Flexibility of CSA Terms. The FCC has decided the channel sharing deals will not have to match the term of a CSA to the expiration date of the underlying FCC licenses (although the FCC has invited comment on whether CSAs should be subject to a minimum length of term).

No FCC Review of CSAs until AFTER the Auction – As noted above, CSAs are supposed to be entered into and submitted to the FCC prior to the auction. But the FCC now says that it won’t get around to reviewing the substantive content of any CSAs until after the auction – which gives rise to the possibility that deals may have to be re-worked post-auction if the Commission finds terms in them that raise regulatory problems. (It will review CSAs before the auction only to “to confirm that the parties qualify for the anti-collusion rule exception”.)

No problem, according to the FCC. It assures us all that it has no interest in substituting its judgment for the judgment of CSA participants “with respect to the terms of the agreement”. Any post-auction CSA review will be limited to “confirming that the CSA contains the required provisions and that any terms beyond those related to sharing of bitstream and related technical facilities comport with our general rules and policies regarding licensee agreements”. Still, sharers would be well-advised to insure that their CSAs provide for what happens if the FCC doesn’t like a term that the parties consider to be critical.

No Change of Class If Sharing Terminates. The FCC observes that commercial and noncommercial stations may share a channel, and Class A and full power stations may also share. But sharing won’t change their regulatory status apart from the fact that a Class A station sharing on a full power channel will enjoy the benefit of extra power. If a sharing deal breaks up, the noncommercial station will remain subject to noncommercial rules, even if it was sharing a channel not reserved for noncommercial use; and a Class A station will have to revert to Class A power limits even it was sharing a full-power commercial channel.

Further Items Out for Comment.

As noted above, the FCC has also posed a number of questions about further issues that will need to be addressed with respect to CSAs entered into outside the context of the spectrum auction. Generally, the Commission contemplates applying the same overall matrix of operational and licensing rules to such post-auction arrangements as will be applied to pre-auction CSAs. Those include the provisions relating to sharing arrangements between full-power and Class A stations and between commercial and noncommercial licensees. The Commission invites comments on that approach, as well as other questions, including:

Second Generation Sharers’ Construction Periods. “First Generation” CSAs – i.e., agreements entered into by auction participants – will have to be implemented within three months after the auction. But what about Second Generation CSAs involving a sharer that opted not to participate in the auction? In order to move onto somebody else’s channel pursuant to a CSA, such a second generation sharer would have to file for a construction permit to do – but should that permit, when issued, be subject to a three-year construction term (i.e., the standard shelf-life of a CP), or a three-month term?

Carriage Rights for Channel Sharers. The Spectrum Act provides that stations choosing to share a channel won’t lose any of their MVPD (cable and satellite) carriage rights. The idea is that the total number of stations with such rights won’t change, and it doesn’t matter how many or how few TV channels those stations occupy. But Second Generation CSAs give rise to the possibility that sharers might include entities that never owned a station before (and thus never had any carriage rights to begin with). Will such entities be entitled to carriage?

The FCC has tentatively concluded that a sharer will have carriage rights only if it possessed such rights through an auction-related channel sharing agreement or because it was operating on its own non-shared channel and had carriage rights immediately prior to entering into a channel sharing agreement. However, the Commission expressly invites alternate suggestions.

So the FCC has opened some new opportunities for channel sharing, though perhaps not as much as some parties would like. Sharing remains a useful idea that may be financially advantageous and otherwise attractive to some stations, but sharing is still a bit of a minefield whose topography is still shifting. Anyone contemplating some type of sharing arrangement should be careful to get maximally familiar with all the relevant rules as soon as possible.