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FCC Caps Discounts for Designated Entities in Auctions

The FCC's controversial Designated Entity program that encourages small- and minority-owned companies and rural organizations to participate in spectrum auctions was approved as the Commission adopted new "competitive bidding rules" in a partisan 3-2 vote. 

The plan puts a cap for the first time on the amount of bidding credits that small businesses can receive in auctions. The discounts for small and minority businesses will be $150 million in the 2016 spectrum auction, and there will be a $10 million cap on the overall amount that a small or minority business or rural carrier can receive.  The rules would also ban joint bidding between companies such as Sprint and T-Mobile. It includes prohibitions on bids that involve shared bidding strategy and multiple auction applications by parties with common controlling interests.

The new rules put limits on spectrum that a designated entity can lease to non-controlling investors. The FCC's action seeks to block the type of bidding scheme that Dish Network used to acquire spectrum during the recent AWS-3 spectrum auction.  

FCC chairman Tom Wheeler said he is "committed to providing innovative, bona fide small businesses the opportunity to participate meaningfully in spectrum auctions, and to spur additional competition."

"Our competitive bidding rules must be carefully crafted and vigorously enforced to protect the integrity of our auction program," he said.  

Commissioner Mignon Clyburn said the new rules "will give more flexibility to small businesses to enter into business models that should allow them to acquire licenses and thrive in the commercial wireless industry."  She cited the challenge to the Commission in finding "the proper balance between allowing small businesses to acquire spectrum through DE credits on the one hand, and preventing parties from circumventing the purpose of those rules and being unjustly enriched on the other."

Commissioner Jessica Rosenworcel, in one of the rare references during Thursday's session to the cancelled agenda items dealing with the 600 MHz spectrum auction, said, "We need to think beyond it and do so now."  She insisted that the rules will assure that "only appropriate companies will receive DE status" and that they will create more opportunities.

Commissioner Ajit Pai, in his vituperative dissent, said the DE program "has been plagued by abuse."  He accused the Commission of "creating new loopholes because winners could lease 100% of spectrum to big legacy carriers." He criticized the decision "to jettison the very safeguard ... that will invite more abuse." Pai said that the decision violates legal requirements that DEs should "have a significant involvement in the provision of services to the public - not merely passive ownership of the license."

He also asked, "What's the use of a cap if a large company can avoid it by simply setting up more than one shell DE?"  He proposed that the FCC prohibit a large firm from holding "more than a 40% stake" in a second DE regardless of whether it claims any interest in it.

Commission Michael O’Rielly, in his dissent, focused on "one fundamental question: should designated entities receiving taxpayer money to subsidize the purchase of a valuable public resource have to provide any actual service to the American people?"

"It is my firm belief that the statute, not to mention common sense, requires small business benefitting from the spectrum subsidies construct facilities in order to offer wireless services to consumers."  

And in another example of the growing partisan rancor on the polarized Commission, O'Rielly pointed out that the Democratic majority of Commissioners rejected the edits to the order that he and Pai requested that would have required DEs to build facilities.

For his part, Wheeler responded that he is "surprised and disappointed at my colleagues' arguing to limit opportunity." He cited Congress' directive to disseminate licenses to a "wide variety of applications including small businesses, rural telephone companies and businesses owned by members of minority groups and women."

Looking at Pai and O'Rielly (difficult since they sit at opposite ends of the long banc where the Commission meets) Wheeler said, "You can't claim that you're pro opportunity and then define it in a way that limits opportunity." 

"I'm fascinated that those who preach regulatory humility want to micromanage down to the business model," Wheeler fumed. "The matter of economic inequality is a grave national concern."

Separately, in a rare unanimous vote, the Commission adopted a proposal from its Enforcement Bureau to eliminate 11 field offices. The reduction will drop the work force from the current 90 employees in the field to 54 people. The two Republicans on the FCC voiced concern that the cutbacks will reduce capabilities to monitor pirate radio, wireless communications and other services.  Pai also complained that the process comes at a time when staffing at the bureau's Washington office is growing.  He cited "widespread opposition" to the field office cutbacks from wireless carriers, broadcasters and public safety officials as well as from "Democrats and Republicans on Capitol Hill."

"We need to repair the relationship between the enforcement bureau's front office and its field agents," Pai said.