AT&T, T-Mobile urge FCC to change DE rules, while U.S. Cellular, CCA warn against drastic reforms

The battle lines are being drawn over changes to the FCC's bidding rules ahead of next year's incentive auction of 600 MHz broadcast TV spectrum. AT&T (NYSE:T) and T-Mobile US (NYSE:TMUS) want the commission to place restrictions on its designated entity (DE) rules to guard against what they argue was Dish Network's (NASDAQ: DISH) unfair manipulation of the rules during the recent AWS-3 spectrum auction. 

However, one of Dish's DE partners, the Competitive Carriers Association and U.S. Cellular (NYSE:USM) have urged the FCC not to make drastic changes to the rules, arguing that the current DE rules benefit smaller carriers and small businesses.

Dish participated in the AWS-3 auction through three entities: American AWS-3 Wireless, Northstar Wireless and SNR Wireless. American AWS-3 Wireless is a wholly-owned, direct-subsidiary bidding entity for Dish, and it did not win any spectrum in the auction, though it did make bids. Northstar Wireless and SNR Wireless, however, made $13.3 billion in gross provisional winning bids. Both Northstar and SNR bid as DEs, a designation that receives a 25 percent discount on spectrum purchases. Dish's designated entities bid for 702 licenses, winning 25 MHz of total spectrum including 13 MHz of paired spectrum. Dish holds an 85 percent economic interest in Northstar and SNR. 

The DE rules are aimed at helping small businesses, rural telephone companies, and businesses owned by members of minority groups and women participate in spectrum auctions. Thus, the Dish designated entity partners are seeking $3.3 billion in DE discounts, though the FCC has not yet granted the discounts.

In its comments on the DE rules, Verizon Wireless (NYSE: VZ) argued Dish and its two DE partners engaged in a "bidding ring, intended to drive out competitors and then suppress rivalry among the ring members." Verizon alleged that Dish and the two DEs bid against each other to create a "false perception that multiple other parties were interested in those licenses," and then when other bidders dropped out of bidding they avoided bidding against each other.

"This result is virtually impossible to explain in the absence of coordination and collusion," Verizon said in a recent filing with the FCC. 

Dish has denied the charges and said that it and its two DEs followed the FCC's rules.

AT&T said in its FCC filing that the Dish DEs "drove bona fide small businesses out of the auction. This is clearly not the outcome that Congress or the Commission envisioned when they adopted the legislation and rules enabling the DE program. Without major reform of the DE rules, such gamesmanship could be repeated in future auctions."

In order to prevent such situations, AT&T proposed changes to the FCC's DE rules. The carrier said eligible auction applicants should be permitted to claim a "Small Business/Rural Telco bidding" credit of 25 percent, but to get the credit "an applicant must be in the business of providing commercial communications services to a customer base of less than 250,000 combined wireless/wireline customers." The applicants must also "have average annual gross revenues for the last three completed fiscal years of $55 million or less." The credit would also be capped at $10 million per bidding entity.

T-Mobile does not want to go as far as AT&T in changing the DE rules, but thinks the FCC should make reforms. Specifically, T-Mobile wants the agency to "preserve and strengthen the attributable material relationship ('AMR') rule, adopt new eligibility requirements, and impose stricter unjust enrichment rules, reinforced with more specific build-out requirements, to prevent speculation or warehousing of valuable spectrum resources."

The FCC "should address the risks inherent in allowing bidders that share common, non-controlling interests to participate in an auction, as it proposes to do for commonly controlled entities," T-Mobile wrote. The carrier wants the FCC to require companies or individuals that bid in auctions and are listed on more than one short-form bidding application "to certify that they are not, and will not be, privy to, or involved in, the bidding strategy of more than one auction participant." The FCC should also prohibit individuals from serving as an authorized bidder for more than one auction participant, T-Mobile said.

Northstar is backed by Doyon Ltd., an Alaskan firm owned by Native Americans with interests in oil and land. In its own filing, Doyon, along with the Chugach Alaska Corporation, another Alaska Native corporation, wrote that while "prudent review of public policy programs like the Designated Entity program can be key to successful implementation," at the same time "restrictive rules restricts competition."

Doyon and Chugach wrote that the bids the DE made in the AWS-3 auction will bring money to FirstNet, the public-safety broadband network, and benefit rural Alaskans. "This is vitally important, as rural Alaska remains underserved by both broadband service and public safety resources," Doyon wrote.

The firms added that under federal law, Native American-owned corporations "are considered a minority and economically disadvantaged business enterprise" and that "tribal affiliation rules used in size determinations for 'small' business status as they pertain to Tribes and ANCs are based" on federal laws.

U.S. Cellular noted that it "has participated in the DE program since its inception, and U.S. Cellular's involvement as a DE investor has been vital to its success as one of the few surviving mid-sized wireless carriers."

U.S. Cellular thinks the DE rules should generally be left in place, subject to certain reforms. Specifically, the carrier thinks the FCC "should prohibit persons from having knowledge of, or participating in, the bids or bidding strategies of more than one auction participant" and that this will eliminate the "collusion" abuses alleged to have recently occurred in the AWS-3 auction. U.S. Cellular said it opposes any type of "cap" on the amount of bidding credits a DE may claim in a given auction, as AT&T proposes.

Meanwhile, CCA wants the FCC to repeal the attributable material relationship rules and adopt a two-pronged approach for determining eligibility for small business benefits, along with protections against abuse of the DE program. "The use of de jure and de facto control standards to evaluate DE eligibility would afford flexibility for greater innovation and pro-competitive business models," CCA wrote.

"However, this flexibility also requires targeted and appropriate oversight to ensure that DE benefits are used to achieve their intended purposes," CCA wrote. "Improving the Commission's rules for determining eligibility for bidding credits is a necessary precursor to any reforms to the size or type of bidding credits, as well as any changes to the Commission's rules concerning joint bidding arrangements."

CCA said it is in favor of continuing the availability of small business bidding credits, and urged the FCC "to preserve the administrative simplicity of awarding bidding credits based on the proposed small business definitions. The Commission should not adopt other, more complex schemes that would be complicated to administer and that could be easily gamed."

For more:
- see these FCC filings

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