Throughout his tenure, many of Federal Communications Commission Chairman Ajit Pai’s resources have been spent cleaning up the regulatory messes of his predecessor Tom Wheeler. While Chairman Pai has largely been successful in his efforts (see, e.g., the Restoring Internet Freedom Order and the Business Data Services Order), there unfortunately remains another residual mess from his predecessor’s tenure that the Chairman needs to get off the Commission’s plate: the Designated Entity dispute from the 2014 AWS-3 Auction.
For those who may not have followed the case, at issue were the financial relationships and joint-bidding arrangements among DISH Corporation, Northstar Wireless, and SNR Wireless. The core of the dispute was whether DISH had de facto control over SNR and Northstar or whether these companies were sufficiently independent of DISH to warrant bidding credits of 25% as “Designated Entitles” (“DEs”) under the Wheeler Commission’s rules.
The dispute began when SNR and Northstar—modeling their relationships with DISH on contracts used successfully by DEs and major carriers in prior auctions without FCC objection—believed they complied with the Commission’s DE rules and participated in Auction 97 under the assumption that they were entitled to bidding credits.
And why not?
First, during the “Short Form” application process prior to the auction, DISH, SNR, and Northstar fully disclosed to the Commission all their ownership and bidding arrangements. Finding no objection, the FCC allowed DISH, SNR, and Northstar to participate as Qualified Bidders.
Second, examination of the Auction 97 data revealed that the bidding credits had exceeded $3 billion within one week of the eleven-week auction (Round 23 of 341). Bidding credits would reach nearly $4 billion by the 12th day of bidding, almost all of which was attributable to the SNR and Northstar. The Commission was fully informed about DE bidding activity. Under the Commission’s rules, the agency could have stopped the auction if it thought there was any impropriety. Again, the Wheeler Commission did nothing.
It was only after Action 97 concluded and the results revealed that there were fireworks.
It turned out that SNR and Northstar won 702 licenses worth $13.3 billion, thus qualifying for $3.3 billion in discounts. The sheer size of the bidding credits attributed to SNR and Northstar prompted allegations from losing bidders that DISH, SNR, and Northstar somehow bamboozled the Agency about their relationship. In fact, the credits as a share of auction revenues were in line with past auctions, but Auction 97 was the largest grossing spectrum auction to date (at $45 billion) so the discounts looked bigger than normal.
Then-Commissioner Pai led the charge in asserting the rules needed to be changed and that the Wheeler Commission was asleep at the switch. As a first step, within months after Auction 97 concluded, the Agency amended its DE Rules both to cap significantly the amount of bidding credits a DE may receive and to ban joint-bidding agreements for future auctions. In so doing, however, the FCC essentially admitted that the undesired outcome of Auction 97 was a logical outgrowth of its own rules in place for that auction. More importantly, these amended rules—passed with an increasingly rare 5-0 vote with three Democratic Commissioners in favor—effectively neutered the DE program going forward.
But recognizing that it cannot apply its rule changes retroactively, the Commission needed a different legal theory to strip SNR and Northstar of their bidding credits. The Agency opted for a more subtle solution: Although the Commission expressly conceded that “the entire record indicates” that the two DEs complied with the Agency’s rules and adhered to precedent, the Commission declared that the SNR and Northstar “simply proceeded under an incorrect view about how the Commission’s affiliation rules apply to these structures” and under the “totality of the circumstances” SNR and Northstar did not warrant DE classification.
This case was eventually appealed to the D.C. Circuit in SNR Wireless Licenseco, LLC v. Federal Communications Commission, 868 F.3d 1021 (D.C. Cir. 2017), cert. denied, 138 S. Ct. 2674 (2018). While the court held that the FCC reasonably determined that DISH exercised a disqualifying degree of de facto control over SNR and Northstar, the court also held that the Commission did not give SNR and Northstar adequate notice that they would be denied an opportunity to cure. As a result, the court remanded the matter to the FCC to give SNR and Northstar an opportunity to seek to negotiate a cure for the de facto control the FCC found that DISH exercised over them.
While the Commission released an Order on Remand on January 24, 2018 to begin the process mandated by the court, that process seems to have stalled. In June 2018, Northstar and SNR, on their own motion, filed amended agreements to cure all of the alleged de facto control issues identified by the FCC. Still, as of this writing, there has been no meaningful movement in the docket and a significant chunk of valuable, near-nationwide AWS-3 spectrum has remained undeployed and under a legal cloud as the country yearns for more wireless broadband capacity.
Despite the large number produced by the auction, Chairman Wheeler’s administration of Auction 97 was hardly a model of regulatory competence. Accordingly, resolution of this case would provide Chairman Pai with another win under his belt. Not only would valuable spectrum finally be put to use, but the Trump Administration could savor the delicious irony that this dispute forced a Democrat-controlled FCC to kill one of the Democrats’ favored subsidy programs.
Let me explain:
By giving discounts to some bidders, the statutory-based DE program spoils the fundamental purpose of spectrum auctions to place spectrum licenses in the hands of parties that value them the most. Such a legislative scheme is ripe for arbitrage, with smaller parties obtaining licenses and then flipping them for profit, directly or otherwise, to companies that can actually use them. The DE program is, put simply, bad policy—irrespective of its altruistic intent—but substantially curtailing the DE program was good, deregulatory policy.
However, this deregulatory policy was not the result of a sudden enlightenment from the Obama Administration; instead, the real credit must be given to SNR and Northstar. As firms are not passive recipients of regulation, SNR’s and Northstar’s compliance with a problematic scheme exposed its warts and (ironically) drove the Wheeler Commission to deregulatory reform during a period of regulatory excess (including engaging in assorted attempts to loosen existing protections in the DE program so that Chairman Wheeler’s favored political constituencies could more easily flip spectrum obtained in Auction 97).
Somewhere, Ronald Coase is smiling.
It is time for Chairman Pai to put this docket to bed. The U.S. has an unquenchable need for commercial spectrum. Inaction is leaving quality spectrum idle. For all his accomplishments, Chairman Pai’s greatest legacy will be the repurposing of more spectrum than any other Administration. A few years back, we all thought the National Broadband Plan’s demand for 500 MHz of new spectrum for wireless services was a pipe dream. Chairman Pai already has repurposed multiples of that figure. The Chairman should continue to build that legacy.
An obvious and easy solution is to find that SNR’s and Northstar’s amended agreements are satisfactory, and then grant them the spectrum with credits. Allowing this premium spectrum to remain in regulatory purgatory is senseless.
Let’s move on.