T-Mobile has asked the FCC to prevent Dish Network and the Dish-backed designated entities (DEs) SNR and Northstar from bidding on the wireless licenses the FCC will have to re-auction and get more upfront money.

The FCC concluded that Dish's funding of those entities constituted control and denied them $3.3 billion in bidding credits they sought for the licenses they won in the AWS-3 auction.

Dish declined comment.

They decided to selectively default on licenses equal to the amount of credits they didn't get, but the FCC said they could still re-bid on those licenses in a new auction necessitated by the default — the FCC has had to re-auction defaulted licenses before.

Disalllowing them from the re-auction is necessary, T-Mobile said, "to prevent Dish and the Dish DEs from further gaming the system, and to send a clear message that the behavior of Dish and the Dish DEs will not be tolerated in others."

In a filing with the FCC Monday, the wireless company said the FCC "should prohibit Dish and the Dish DEs from bidding in the future on AWS-3 licenses on which the DISH DEs 'selectively' defaulted and consider Dish and the Dish DEs 'former defaulters,' requiring them to provide a 50% greater upfront payment if they wish to participate in the upcoming incentive auction."

T-Mobile said if the FCC allows Dish and the DEs to re-bid, the companies should be held to the same build-out schedule as those that have already won spectrum in the first auction, suggesting that the FCC needs to impose stronger penalties on selective defaults.

Dish had put up most of the money for the two DEs to bid $10 billion on wireless spectrum licenses in the AWS-3 spectrum auction. The licenses were actually worth $13.3 billion, but as diverse owners, SNR and Northstar sought designated DE credits in that amount.

The FCC denied that credit due to Dish's investment and its plans to run the network. 

The FCC order concluded that Dish's majority financial interest in the companies are controlling interests that should be attributable to Dish, which means the companies are ineligible for the $1.9 billion (Northstar) and $1.4 billion (SNR Wireless) bidding credits they had applied for.

The order explained that the credits were denied because Dish had provided the two minority-owned companies the majority of their capital and had contracted to build out and run their wireless network, which the FCC concluded was a controlling interest that invalidated the small business.

Policymakers and regulators often talk about looking out for the little guy. Our rules and regulations are replete with provisions to advance diversity, inclusion and opportunity for minority, women and disadvantaged businesses.

Nowhere is this more evident than in the communications laws, where key sections outline incentives to help the little guys compete with the big boys in obtaining government licenses and contracts. What often confounds well-intentioned policy, however, is the sheer scale of doing business in these areas, where the price of entry typically runs into the hundreds of millions of dollars, especially for mobile, wireless and spectrum licenses at auction.

In Title 47 of the Code of Federal Regulations, designated entities (DEs) are defined as small businesses, businesses owned by members of minority groups and/or women, or rural telephone companies. The code details the rules for DE licenses, permits, financial ownership, control, bidding credits and applications. These rules are complex, dense and cumbersome — with enough gray area to entice adroit lawyering and legal legerdemain. And that, apparently, is what happened when two DEs won licenses in the FCC’s $41 billion AWS-3 wireless auction, the richest and most successful in history.

Dish Network made an 85% investment in two minority-owned DEs (one Alaskan Native, the other African- American) and entered into an express joint bidding agreement in hopes of competing with the leading telcos for wireless spectrum. The FCC has an anti-collusion rule, but a provision in the Communications Act allows an exemption for these arrangements to promote competition in its auctions, provided, among other things, they are publicly disclosed. In upholding the validity of these arrangements, the FCC noted in a 2010 Opinion and Order: “The Commission has recognized that one way of promoting competition is to permit entities to enhance their ability to win licenses in auctions by combining their resources and that small businesses in particular may need to pool financial and other resources in order to compete in auctions.”

So if that’s the policy and those are the rules, what is all the controversy about?

Before and during the auction, Dish coordinated its own strategy with the two minority-owned DEs. This coordination gave the Dish entities more flexibility and control over their bids and ultimately led to the capture of a whole lot of spectrum by the Alaskan Native and African-American DEs — an outcome no one but Dish had envisioned. And therein lies the problem. Dish’s adept use of the DE rules resulted not only in its own benefit, but also in the instant creation of the largest minority owners of spectrum in history. Whether these firms are classic “fronts” in old-school parlance, is doubtful, but whatever they are, the FCC’s rules allowed them to survive, exist and thrive in this auction.

Although the subject of much scrutiny and criticism, the DE rules have been around for more than 15 years. In fact, the FCC has opted more than once not to change the rules or limit how much spectrum DEs could acquire. In their recent deliberation on the rules for the AWS-3 auction, all five commissioners voted not to impose any caps on the amount of bidding credits that could be used. This set the stage for Dish’s coup.

Much is being made about DE discounts being leveraged to enrich wealthy individuals — a veiled reference to the licenses acquired by David Grain, CEO of Grain Management, a wealthy, well-connected African-American investor who gets a deep discount buying spectrum, and makes a nice profit by leasing to incumbent carriers at full price. Nice work if you can get it, but some say Grain’s deal enriches only himself, whereas the Alaskan Native deal will have a multiplier effect providing jobs and opportunity for a larger community. Leaving that discussion for another day, let’s just say Grain’s arrangement remains under a cloud and the FCC’s rules are at the heart of the problem.

We have learned a few things from the auction. First, there seems to be a lot of enmity towards Charlie Ergen, Dish’s chairman. Maybe that’s is because he has amassed huge amounts of spectrum, or because he reportedly is rough around the edges and does not play well with others. Whatever the reason, Dish has not gotten the benefit of the doubt — and that seems unfair and un-American. Also, this is not a simple issue. The bar to entry in the auction game is so high, very few DEs can qualify on their own. But when they partner with a big player and win, someone cries foul. If Dish played by the rules at the time of the auction — and was more innovative than others — it should not be penalized by the referee after the game.

As Congress and the FCC debate the DE rules, let’s hope the revisions will level the field for qualified DEs to participate in meaningful ways. If that is the outcome of the post-game rules change, then it might somehow further the public interest. If not, we can always dial up the legendary Frank Washington and venerable Dick Wiley to help revive the highly successful tax credit program. Wouldn’t that be something?

In the meantime, as they say in the stands, “Don’t hate the players, hate the game.”

Adonis Hoffman is founder and chairman of Business in the Public Interest and adjunct professor at Georgetown University. He is a former chief of staff and senior legal adviser at the Federal Communications Commission.

Dish said Wednesday it had met with FCC Wireless Bureau staffers who told it that an order circulated by FCC chairman Tom Wheeler to the other commissioners had denied over $3 billion in designated entity bidding credits to Northstar Wireless and SNR Wireless, who together were among the top bidders in the AWS-3 spectrum auction earlier this year.

The order concludes that Dish's majority financial interest in the companies are controlling interests that should be attributable to Dish, which means the companies are ineligible for the $1.9 billion (Northstar) and $1.4 billion (SNR Wireless) bidding credits they had applied for.

According to Dish, the FCC will not designate the issue for hearing or refer it to the Enforcement Bureau or the Justice Department.

The order must still be voted by the other commissioners, but it is expected to have the votes to pass.

"Dish has a tremendous amount of respect for the FCC commissioners and staff," said Dish EVP and general counsel, R. Stanton Dodge, "and we appreciate their hard work on this matter. However, we respectfully disagree with the proposed denial of the bidding credits. Our approach to the AWS-3 auction, which followed 20 years of FCC precedent and complied with all legal requirements, was intended to enhance competition -- in the auction and in the marketplace long term. Our investments in NorthStar and SNR helped make the AWS-3 auction the most successful spectrum auction in FCC history, and resulted in more than $20 billion of direct benefit to the American taxpayer.”

Rep. Frank Pallone (D-N.J.), ranking member of the House Energy & Commerce Committee, and the five supporters of his bill, The Small Business Access to Spectrum Act, are sending a letter to the Federal Communications Commission today (Wednesday, June 24), telling the agency how they would like the commission to modify its Designated Entity rules for auction rules for spectrum auctions to insure access by small businesses.

Those co-sponsors are Democratic committee members Reps. Bobby Rush (Ill.), Yvette Clarke (N.Y.), G.K. Butterfield (N.C.), Doris Matsui (Calif.) and Ben Ray Lujan (N.M.).

In the letter, a copy of which was obtained by Multichannel News, the legislators are pushing a two-pronged approach. First, they said, the FCC should curb "gaming" of the DE program by multibillion dollar corporations. The FCC can do so, they say, by limiting the size of the small business credit that any one DE can receive and take "additional measures" to limit large corporations' use of the program. They say that will give small businesses a fair shot at spectrum without incentivizing large corporations to gain a bidding advantage "under the guise of being a small business."

The second prong is to get rid of what they say are outdated requirements, including the attributable material relationship (AMR) rule, and liberalize policies on small businesses leasing opportunities. They also want the FCC to give DEs the ability to forego DE benefits on one license and still be eligible for them on others.

"It is time to recognize that there may be other ways to enter and compete in the wireless marketplace," they said. They are pretty much preaching to the choir.

FCC chairman Tom Wheeler has said that the commission would update those DE rules, though the bill would put the FCC on a 90-day clock to do so.

Responding to questions about Dish's 85% stake in two companies applying for $3.3 billion in DE bidding credits in the recently-completed AWS-3 auction, Wheeler told Congress earlier this year that he did not want slick lawyers gaming the system and that the commission would update the rules.

The "gaming the system" comment stems from complaints that Dish could get billions in DE discounts via bids it made in the AWS-3 auction through two companies in which it holds a majority interest. 

The FCC is planning to circulate order on auction procedures this week that could address the DE issue.