FCC passes rules on spectrum auction bidding intended to thwart replay of Dish's AWS-3 strategy

WASHINGTON—The FCC voted 3-2 to approve new competitive bidding rules for spectrum auctions that the majority of the commissioners at the agency said would block the kind of bidding strategy that Dish Network (NASDAQ: DISH) employed during the AWS-3 spectrum auction.

The rules would cap for the first time the amount of bidding credits small businesses and so-called "designated entities" could get in auctions--for the incentive auction it will be capped at $150 million, and a $10 million cap on the overall amount that a small business or rural carrier can receive in smaller markets. 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. 

Further, the rules would also ban joint bidding arrangements between nationwide wireless carriers, something Sprint (NYSE: S) and T-Mobile US (NYSE:TMUS) have pushed for. They will be barred from bidding together in the FCC's planned incentive auction of 600 MHz broadcast TV spectrum, and joint bidding agreements that involve a shared strategy for bidding at auction will be barred. Arrangements that are solely operational (such as for roaming or leasing) will be allowed as long as they are disclosed.

In terms of other joint bidding rules, the rules would permit designated entities to participate in consortia with other designated entities, resulting in a single bidder. Non-nationwide carriers will be allowed to participate in joint ventures with other non-nationwide operators. However, the FCC will prohibit multiple applications by one party and by parties with common controlling interests, subject to certain exceptions, such as if a group of rural carriers form a consortium.

A rural carrier will qualify for a 15 percent bidding credit if it has 250,000 combined wireless, wireline, broadband and cable subscribers or fewer and serves primarily rural areas. Importantly, the rules also remove the policy that requires small businesses to provide facilities-based service in order to qualify for bidding credits.

The new rules would limit the amount of spectrum that a designated entity may lease to any of its non-controlling disclosable interest holders, such as investors, during the five-year unjust enrichment period after an auction. The rules would also place designated entities "on notice" regarding the types of investor agreements that raise concerns about which entity is controlling the decisions of a designated entity.

The three Democrats on the commission--Chairman Tom Wheeler and Commissioners Mignon Clyburn and Jessica Rosenworcel--voted to approve the new rules. The two Republican commissioners, Ajit Pai and Michael O'Rielly, dissented, and said that they thought the $150 million cap was too large. Additionally, both Pai and O'Rielly took strong issue with the FCC's decision not to require DEs to be facilities-based providers.

Pai said that instead of closing loopholes, the new rules grant the "FCC's blessing of new loopholes through which even a minimally competent attorney could drive a truck." In particular, he said it "paves the way for DEs to obtain a 35%, taxpayer-funded discount on auctioned spectrum and then turn around and lease 100% of that spectrum to AT&T, Verizon, Sprint, or T-Mobile."

Pai said the FCC's order "leaves the door open to a large carrier that owns 99% of a DE--and is itself too large to qualify for any small business discount--to use up to 25% of its DE's discounted spectrum. And that's just during the unjust enrichment period. After that, the large carrier can use every last megahertz of the DE's spectrum."

Additionally, Pai noted that T-Mobile said in filings with the FCC that allowing 100 percent leasing effectively would gut the purpose of the designated entity program and "'increas[e] the likelihood that designated entity benefits unfairly flow to ineligible entities or to speculators that acquire or warehouse spectrum at the expense of actual service providers that need it.'"

Pai also said "ditching the [facilities-based] rule only increases market concentration since, as I noted, spectrum will be flipped from smaller providers to the largest wireless carriers in the country." Pai also said that the FCC "has consistently read the Communications Act to require that the DE program benefit facilities-based operators, not passive speculators."

In response, Wheeler said that in today's wireless market an entrepreneur can't compete with four Tier 1 carriers owning 98 percent of the market. "The statute directs us to promote economic opportunity by designating entities to hold licenses in the environment that exists," he said. "Not the environment that can exist. Not the environment that is imagined. But the reality that exists."

Wheeler said "the statue says not one word about a requirement that there be facilities-based retail services. The concept of economic opportunity is a concept of asset ownership. It is created by asset ownership. The instructions of Congress were to facilitate asset ownership."

Wheeler continued: "The way you make asset ownership feasible in today's mobile environment is to own that asset and then to work with others so that the asset is used, and not necessarily have to go out and offer Tom and Jane Cellphone Service."

Responding to Dish's AWS-3 strategy was a key factor in the FCC's new rules. 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 "designated entities," a designation that receives a 25 percent discount on spectrum purchases.

Thus, the Dish-designated entity partners are seeking $3.3 billion in discounts. However, the FCC has yet to grant the licenses to Northstar and SNR, in which Dish holds an 85 percent economic interest. Dish's designated entities bid for 702 licenses, winning 25 MHz of total spectrum including 13 MHz of paired spectrum. Dish said it and its designated entities followed the rules, while other carriers, lawmakers and Pai himself have said Dish had gamed the system. The FCC is still reviewing whether to give the credits to the Dish-affiliated DEs; Dish and the DEs said they followed the agency's rules.

The change to competitive bidding rules took center stage at the meeting after the FCC postponed its vote on rules for next year's planned incentive auction of 600 MHz broadcast TV spectrum from today until Aug. 6 after pressure from Congress to push back the vote. Despite the postponement, Wheeler thinks the auction can still take place in early 2016. The delay in the vote will push back by several weeks decisions on how the auction will be structured, the rules for opening bid prices for broadcasters' spectrum and how large the spectrum reserve will be for airwaves set aside for smaller carriers to bid on. For more on that, see this story.

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FCC's Wheeler proposes auction bidding rules that would prevent rerun of Dish's AWS-3 strategy
FCC seeks comment on new rules that would block a replay of Dish's AWS-3 auction bidding strategy
FCC's Wheeler vows to fix designated entity rules so that huge companies can't get discounted spectrum
Verizon joins AT&T, T-Mobile in asking FCC to take a tougher stance on joint bidding
AT&T slams Dish's AWS-3 auction bidding strategy, suggests rule changes for incentive auction