The Federal Communications Commission needs to designate
the so-called “Designated Entities” program for meaningful reform.
Although the legislation authorizing the FCC to conduct
spectrum auctions promotes allocation of spectrum for the highest and best use,
it also permits the FCC to give preferences, in the form of “bidding credits,”
to Designated Entities in order to promote participation by small businesses in
the auctions. Not surprisingly, the FCC has struggled over the years, with
limited success, to implement the “small business” program in a way that avoids
abusive conduct. I say, “not surprisingly,” because it is not easy to devise a
complicated regulatory regime – one that, by design, promises special
preferences and large financial rewards to particular “designated entities” –
in a way that does not invite abuses and unjust enrichment.
And in the case of spectrum auctions, while certain
parties taking advantage of their favored designation may be unjustly enriched,
taxpayers are unjustly harmed by the same measure. In the most recent
controversy surrounding the program, it appears that substantial,
non-controlling interests from large bidders raise concerns about the integrity
of the program, particularly when joint bidding is involved.
In many respects, the recent AWS-3
auction, which garnered nearly $45 billion in revenues (reduced by about
$3.3 billion because of DE bidding credits), was a success. However, whatever
success the auction enjoyed has been somewhat called into question by the joint
bidding of Dish and two small DEs, Northstar, and SNR Wireless. It turns out Dish
has a non-controlling 85 percent ownership interest in the DEs. All three firms
together accounted for about $10.3 billion in winning bids. Although large
bidders have had substantial, non-controlling interests in DEs in the past, the
type of joint bidding arrangement used in the AWS-3 auction apparently is
unprecedented.
FCC Commissioners Pai
and O'Rielly
have expressed concerns regarding the operation of the DE program, including in
the context of the AWS-3 auction. Commissioner Clyburn also has expressed concern,
albeit more mildly. And Chairman Wheeler, to his credit, ordered the staff to
take a close look at the program and issued a detailed Public
Notice seeking comment.
Based on an economic analysis of the auction bidding,
Verizon has
suggested that Dish, Northstar, and SNR Wireless engaged in
anti-competitive, collusive bidding. A coalition of mobile companies, including
AT&T and a number of small companies, propose to
reform the DE program by eliminating joint bids by a bidder with significant
ownership interests in other joint bidders seeking to utilize DE bidding
credits. The coalition proposes to preserve DE credits for genuine small
businesses as well as rural telephone companies. It suggests that its reform
proposal would preserve the DE program’s original intent, without giving unfair
advantages to multi-billion dollar bidders.
Dish, of course, argues
that it, Northstar, and SNR complied with the existing rules, including bidding
disclosure requirements. Dish argues that its participation increased auction
receipts, financing for small companies, and the diversity of bidders.
Whether or not Dish, Northstar, and SNR complied with the
existing bidding rules is not irrelevant, of course. But, for me, it is not the
main point, which is that spectrum auctions, to the maximum extent possible,
should be conducted on an unencumbered, free market basis, without special
dispensations and preferences. This will ensure that spectrum is put to the
highest and best use, maximizing consumer welfare. In the bargain, it will
maximize auction revenues to the benefit of the nation’s taxpayers.
The DE program, obviously a special carve-out to the
unencumbered auction principle, is meant to help small businesses, rural
telephone companies, and businesses owned by minority groups gain access to
spectrum. Unfortunately, however, the DE program has not been very successful
in achieving its objectives, however valid they may be. And in the past the
program has
arguably produced skewed bidding results. Moreover, the majority of small
business bidders, excluding companies associated with rural telephone
companies, end up selling their spectrum to the highest bidders, rather than
building out networks. On top of all this, DE auction awardees often are mired
in post-auction litigation for long periods, resulting in network build-out
delays that otherwise might not have occurred.
All this said, the FCC is right to designate the
Designated Entities program for meaningful reform to curb abuses. When abusive
conduct occurs that is inconsistent with the underlying public policy purposes
of the DE program, it undermines the integrity of particular auction results.
Perhaps more importantly, abuses also undermine public confidence in the
Commission’s ability to carry out its duties effectively and efficiently.
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