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EXPLANATORY MEMORANDUM

and
REVISED DRAFT MEMORANDUM CIRCULAR
on
THE ALLOCATION AND ASSIGNMENT OF
3G LICENSES AND RADIO FREQUENCY BANDS
As part of the continuing administrative process leading to the
formulation of the proper regulatory policy in the assignment of thirdgeneration mobile communications technology (3G, for brevity) licenses
and frequencies, the National Telecommunications Commission (the
Commission, for brevity) released the second draft of the proposed
memorandum circular on the allocation and assignment of 3G licenses
and radio frequency bands (the second draft, for brevity) and again
invited comments thereon from the public. Taking into account the
various comments submitted in response to the issuance of the second
draft, the Commission hereby issues the following memorandum to
further clarify the said concerns, which shall hereinafter be treated
sequentially.
QUALIFICATION CRITERIA
?? Roll-Out Obligations Under Executive Order No. 109
Current cellular mobile telephone system (CMTS, for brevity)
operators argue that of the current CMTS operators, only those which
have completely fulfilled their obligations to roll out local exchange
carrier (LEC, for brevity) lines, as mandated by Executive Order No. 109
and Republic Act No. 7925, should be allowed to qualify for the
assignment of 3G licenses and frequencies and that the obligations to be
imposed on new players ought to carry the same cost as those mandated
on existing CMTS operators.
It bears pointing out, however, that NTC Memorandum Circular
11-9-93 (MC No. 11-9-93, for brevity), or the Implementing Guidelines on
the Provisions of E.O. No. 109, already governs the obligatory
provisioning of LEC services by, among others, CMTS operators. Under
Sections 30 of MC No. 11-9-93, violators thereof are subject to the
penalties provided for in Executive Order No. 59 and its implementing

rules. Section 31 further states, among others, that the authorizations


granted to CMTS operators who fail to provide local exchange service
shall be cancelled after due notice and hearing.
In this regard, the Commission believes that the issue of a CMTS
operators failure to comply with its obligations under E.O. No. 109
should be dealt with under the provisions of MC No. 11-9-93 and should
not be subsumed into the memorandum circular on the allocation and
assignment of 3G licenses and radio frequency bands as it is a distinct
and separate issue. Furthermore, the disqualification of erring CMTS
operators from acquiring 3G licenses on account of their failure to fully
comply with their obligation of rolling out LEC lines would amount to an
additional penalty imposed on account of said violation; the
disqualification would amount to a violation of due process as the
penalty has not been subjected to the requisite administrative process.
As previously mentioned in the explanatory memorandum
accompanying the second draft, the obligation imposed on the
prospective awardee of a 3G license need not be as onerous or costly as it
seems as they are allowed, under the guidelines promulgated by the
Commission to cover unserved municipalities and barangays with public
calling offices and telecenters within a time period and equivalent number
of lines to be determined by the NTC in its issued authorization, adopting
a technology neutral policy with flexibility in tariff application. The said
guidelines, which were duly approved by the Department of
Transportation and Communications when the Commission was still an
attached agency of the former, continues to be in effect. Furthermore,
and as may be evidenced by several administrative decisions rendered by
the Commission, public telecommunications entities (PTEs, for brevity),
including 2G operators, have taken advantage of the provisions of the
said guidelines to alleviate the financial burden entailed in the roll out of
LEC lines in their respective service areas.
The Commission stressed in the explanatory memorandum
accompanying the second draft that prospective 3G licensees are to be
subjected to the same obligations for universal service imposed on
current CMTS operators employing the 2G system. Since it is cognizant
of the low demand for LEC lines and of the financial burden entailed in
the their roll out, however, the Commission pointed out that the said
roll-out obligation may not be as financially taxing as before with the
promulgation of the abovementioned guidelines inasmuch as public call
centers may now be established in lieu of individual telephone landlines
in order to sufficiently comply with the provisions of E.O. No. 109 and
R.A. No. 7925. There is therefore no basis for the insinuation that there
is no uniformity on vying CMTS entities.

?? Capitalization Requirements
One CMTS operator posits that the capitalization requirement
mandated by the second draft is inadequate considering the fact that its
estimated investments in 3G amount to US$1.2 billion. The
Commission believes, however, that the amount set forth in the second
draft, PhP400 million, would be sufficient to cover the initial
expenditures of a prospective 3G operator and the imposition of a higher
capitalization requirement would be too financially burdensome for
prospective 3G operators.
?? Mandatory Interconnection of Trunk Radio Networks
Current CMTS operators argue against the mandatory
interconnection of 3G networks with trunk radio networks because they
claim that the latter are closed user group networks. Under R.A. No.
7925, it is an avowed national policy that [A] fair and reasonable
interconnection of facilities of authorized public network operators and
other providers of telecommunications services is necessary in order to
achieve a viable, efficient, reliable and universal telecommunications
services. 1 Thus, under Section 5 (c) of the same statute, the Commission
is decreed to [M]andate a fair and reasonable interconnection of facilities
of authorized public network operators and other providers of
telecommunications services through appropriate modalities of
interconnection and at a reasonable and fair level of charges, which
make provision for the cross subsidy to unprofitable local exchange
service areas so as to promote telephone density and provide the most
extensive access to basic telecommunications services available at
affordable rates to the public.
It bears pointing out that even if they are closed user networks,
trunk radio networks are still considered as public networks and are
therefore within the contemplation of the aforequoted provisions of R.A.
No. 7925. The Commission therefore believes that the provision on the
mandatory interconnection of 3G networks with all public networks,
including trunk radio networks, should be maintained.
?? Track Record
While it is true that proof of track record in the operation of mobile
telecommunications systems, particularly of 3G networks, shall be one of
the criteria in the determination of qualified applicants, it is to be
stressed that present 2G operators are not necessarily at a disadvantage
as the requirement does not necessarily exclude experience in the
1

Please see Section 4 (g)

operation of 2G networks in the appreciation of an applicants


qualifications. Furthermore, as stressed in the explanatory memorandum
accompanying the second draft, current CMTS operators may very well
form strategic partnerships with foreign firms which have the necessary
experience in the operation of 3G networks.
?? Mandatory Network Sharing and Roaming; Network
Coverage and Roll-Out Requirements; Market Readiness
Current CMTS operators likewise voiced out their fear that the
provisions on mandatory network sharing and roaming may unwittingly
allow 3G operators which have not fully complied with their network rollout to hook up with the network of 2G operators as well as that of a 3G
operator which has successfully rolled out its own 3G network. The
Commission believes, however, that a strict implementation and
enforcement of the awardees obligations to begin the installation and
construction of the 3G network and facilities not later that 12 months
from date of award, start commercial operation not later than thirty
(30) months from date of award, and cover at least 80% of the
provincial capital cities and towns and 80% of the chartered cities within
sixty (60) months from the date of award2 are sufficient safeguards
against the mischief sought to be avoided.
It bears pointing out that failure to comply with the
abovementioned obligations, together with the other undertakings set
forth in Section 7 of the second draft, shall be cause for the cancellation
of an erring awardees authority to provide 3G services and for the recall
of the assigned 3G radio frequency bands. More importantly, the
Commission has revised the second draft in such a way that the
construction of a 3G network is made a condition for the operation of the
provision on mandatory network sharing and roaming. Moreover,
milestone dates on the construction of the 3G networks are provided to
further ensure compliance with the roll-out requirements and make the
monitoring thereof more exacting.
One CMTS operator likewise reiterated its argument that the rollout requirement should be reconsidered by reducing the minimum
coverage area and increasing the time duration on account of the
severely negative business case of 3G in the Philippines.
The Commission, however, sees no reason to re -evaluate the rollout rate me ntioned in the second draft (i.e., the obligation to cover at
least 80% of the provincial capital cities and towns and 80% of the
chartered cities within sixty (60) months from the date of award) as the
2

Please see Section 7.1 (c), (d) and (e)

said roll-out rate is the same as that imposed on 2G operators. Moreover,


the bases for such an argument, that is, the low demand for data
services (other than the text messaging) and the high cost of 3G
handsets, are belied by the data supplied by Qualcomm. It may be
gleaned from the comment submitted by Qualcomm that, as shown by
the increasing profitability of 3G operations worldwide, demand for 3G
services are on the rise and that the same trend is expected with respect
to the Philippine market. Additionally, the data supplied reveals that the
price of 3G handsets is steadily dwindling on account of the everincreasing demand for cheaper 3G phones which, in turn, is spurred by
the growing clamor for 3G services.
?? Submission of Rates; Use of Rates in Ranking Applicants
It must be borne in mind that the business in which the awardees
are to engage is one impressed with a high degree of public interest. As a
necessary consequence, the Commission is mandated to strike a balance between
the material interests of the awardees and the need to zealously guard the
welfare of the public, thus the provision on the submission of rates and the use of
rates to be charged to consumers as one of the criteria in the determination of
the most qualified applicant.
The Commission, however, believes that the argument of current
CMTS operators that the provision on submission of a schedule of rates
should be reconsidered in view of the fact that the period contemplated
therein is too restrictive as rates could not be fully projected within the
five-year time frame is well taken. Thus, the Commission hereby resolves
that a two-year time frame would be more proper than the five -year
period set forth in the second draft.
?? Formation of Consortia
One CMTS operator objects to the provision allowing the formation
of consortia as the same may allegedly lead to the formation of a
monopoly composed of dominant PTEs. The Commission does not find
this argument convincing as the number of possible applicants effectively
rules out the formation of monopolies. Under the proposed circular, a
total of five licenses may be awarded to qualified applicants. Thus, a
consortium composed of dominant PTEs may not possibly lock out or
exclude other qualified applicants.
?? Associated Applicants
One CMTS operator argues for the deletion of the rule on
associated applicants as the said provision allegedly restricts companies
5

with separate
applications.

and

distinct

personalities

from

pursuing

separate

The Commission is not convinced by the abovementioned


argument. It must be stressed that R.A. No. 7925 mandates the
Commission to foster fair and efficient market conduct through, but not
limited to, the protection of telecommunications entities from unfair
trade practices of other carriers 3 and protect consumers against misuse
of a telecommunications entitys monopoly or quasi-monopolistic powers
by, but not limited to, the investigation of complaints and exacting
compliance with service standards from such entity.4 The law likewise
decrees the Commission to administer the radio frequency spectrum,
which is a scarce public resource, in the public interest5 and to ensure
wider access thereto.6
The Commission believes that in the allocation of 3G frequencies,
public interest would be best served by considering the applications of
associated corporations as one entity inasmuch as doing so would
ensure that associated corporations would effectively be prevented from
hoarding frequencies and other unfair practices. The rule on associated
applicants likewise makes the allocation more equitable as it ensures
wider access to the limited number of frequencies.
SPECTRUM USER FEES
Current CMTS operators argue that provision mandating the
payment of additional spectrum user fees (SUF) for additional
subscribers should be deleted because doing so is tantamount to taxing
the efficient use of the spectrum and that payment of SUF should be prorated as payment within fifteen days from the date of award is
unreasonable because an awardee would then be compelled to pay even
before it has been placed in effective possession of the frequency.
The Commission believes that the assessment of additional SUF for
additional subscribers is, contrary to the claims of existing CMTS
operators, reasonable and equitable. It bears stress that the formula was
arrived at after a thoughtful consideration of the arguments raised
against the payment of upfront fees, which were initially sought to be
imposed without regard to the number of subscribers and capacity to pay
of prospective awardees. Under the second draft, the amount of SUF to
3

Please see Section 5 (d)


Please see Section 5 (f)
5
Please see Section 5 (c)
6
Please see Section 15
4

be assessed is based on profitability of each 3G operator, on the


assumption that the number of subscribers is a good indication of its
capacity to pay. Moreover, the assessment of additional SUF is likewise
an effective deterrent against the practice of frequency hoarding, and
would thereby result to better management of a scarce public resource.
Though it is not fully convinced of the argument that an awardee
must not be compelled to pay SUF before it has been placed in effective
possession of the frequency, the Commission believes that the payment
of SUF must indeed be pro-rated to ease the financial burden entailed in
the payment thereof. Thus, the Commission hereby decides to apply the
formula set forth in Memorandum Circular No. 10-10-97, otherwise
known as Spectrum Users Fees, in the computation of the SUF. Thus,
under the latest draft of the memorandum circular on the allocation and
assignment of 3G licenses and radio frequency bands, the payment of
SUF is pro-rated in such a way that where the frequency is awarded
prior to June 30, the awardee is obliged to pay for the full amount of the
SUF mentioned therein. On the other hand, where the frequency is
awarded after June 30, the awardee would only be required to pay half of
the amount set forth in the memorandum circular.
NUMBER PORTABILITY
The concerns raised on the provision in the second draft regarding
number portability is well taken. The Commission believes that the
resolution of such a complicated and contentious issue will be better
achieve d through the promulgation of a separate circular on the matter.
Thus, the Commission hereby decides to defer the promulgation of a set
of rules governing the said issue until after a more thorough study of the
matter has been conducted.
APPLICABILITY
OF
THE
PRIOR OPERATOR RULE
The argument of current CMTS operators that the non-exclusivity
of a franchise does not preclude the application of the prior operator rule
in the award of 3G licenses and frequencies has been sufficiently
discussed in the memorandum accompanying the second draft and need
no further extensive elaboration. A cursory reading of the ruling cited by
the Commission therein, that promulgated in the case of PILTEL vs. NTC
and ICC,7 would show that there is parity of factual circumstances
between the controversy which embroiled PILTEL and ICC and the
7

410 SCRA 82

present efforts to promulgate a memorandum circular on the assignment


of 3G licenses and frequencies, thereby necessarily entailing the
application of the principles laid down in the said ruling to the present
administrative process. At the risk of belaboring the obvious, it bears
stressing that the service which ICC sought to offer in the areas covered
by PILTELs provisional authority was not even an enhancement of the
services but was, in fact, exactly the same type of service being offered by
the latter. In striking down PILTELs efforts to exclude ICC from
operating in its (PILTELs) service area through the invocation of the prior
operator rule, the Supreme Court succinctly ruled that:
Likewise, PILTEL's argument that the NTC Order
violates PILTEL's rights as a prior operator has no merit. The
Court resolved a similar question in Republic v. Republic
Telephone Company, Inc. In striking down Retelco's claim
that it had a right to be protected in its investment as a
franchise-holder and prior operator of a telephone
service in Malolos, Bulacan, the Court held:
RETELCO's foremost argument is that
such operations and maintenance of the
telephone
system
and
solicitation
of
subscribers by [petitioners] constituted an
unfair and ruinous competition to the
detriment of [RETELCO which] is a grantee of
both municipal and legislative franchises for
the purpose. In effect, RETELCO pleads for
protection
from
the
courts
on
the
assumption that its franchises vested in it an
exclusive right as prior operator. There is no
clear showing by RETELCO, however, that its
franchises are of an exclusive character. . . .
At any rate, it may very well be pointed out as
well that neither did the franchise of PLDT at the
time of the controversy confer exclusive rights
upon PLDT in the operation of a telephone
system. In fact, we have made it a matter of
judicial notice that all legislative franchises for
the operation of a telephone system contain the
following provi sion:
It is expressly provided that in the event
the Philippine Government should desire to
maintain and operate for itself the system and
enterprise herein authorized, the grantee shall
surrender his franchise and will turn over to the
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Government said system and all serviceable


equipment therein, at cost, less reasonable
depreciation.
There is therefore absolutely no basis for the continued insistence
of current CMTS operators on the applicability of the prior operator rule
in the award of 3G licenses and frequencies.

RONALD OLIVAR SOLIS


Commissioner

JORGE V. SARMIENTO
Deputy Commissioner

JAIME M. FORTES, JR.


Deputy Commissioner