FCC Compromises on DE Rules in Time for AWS Auction
The FCC late Tues. released revised designated entity (DE) rules, in time for June’s advanced wireless services auction. They don’t bar ties between DEs and carriers, but do put tough new controls on what a DE can do with spectrum it buys at a reduced rate using bidding credits. DE sources said provisions in the order virtually guarantee many DEs will sit out the AWS auction. Comr. Adelstein partly dissented, saying the order doesn’t go far enough.
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“The bidding credit in effect vested between years one and 5 and now they've pushed that out to years 6-10,” George Laub, a partner at DE Council Tree told us Wed. “What they have done in the process is substantially raise the bar for DEs to raise capital, both debt and equity. They're going to have disabled a number of DEs and curtailed participation in the auction.”
The report and order -- and a further notice of proposed rulemaking (FNPRM) seeking industry guidance on more changes -- were adopted by the FCC essentially unchanged from versions Chmn. Martin circulated last week, sources said.
The FCC made 2 big changes to DE rules. DEs worry about tough new rules substantially extending “unjust enrichment” restrictions’ duration. The order requires repayment with interest of bidding credits by DEs that lose their eligibility or seek to transfer their licenses to or enter in de facto leases with companies not qualified for credits. In the first 5 years of a license term, DEs would have to pay back 100%. That drops to 75% years 6 and 7, 50% years 8 and 9 and to 25% year 10.
“Investors who are looking to finance DEs are typically looking at investment horizons of 3 to 6 years,” Laub said. “The fact that a DE needs to remain intact for 10 years without being able to sell a part or any of its business calls into question whether the bidding credit is of much value.”
The FCC order imposes curbs on carrier-DE relationships, stopping short of a carrier revenue-based ban on which the FCC couldn’t agree. Instead, the agency chose a resale standard. The FCC decided that, “except as specifically ‘grandfathered’ in” a DE cannot lease or resell more than 50% of capacity it acquires using DE credits. A DE found to have violated this rule will be ineligible for DE benefits in acquiring licenses in FCC auctions and the secondary market and, as applicable, must make “unjust enrichment payments on a license-by-license basis.” The order requires random audits, additional document and transaction reviews and periodic reporting by DEs.
The FCC’s 2 Democratic commissioners, who pressed for DE reforms ahead of the AWS auction, disagreed with each other on whether the new restrictions are tough enough.
Adelstein said the FCC should have stuck to its guns and adopted restrictions on carrier-DE relationships proposed in an earlier FNPRM. He dissented to parts of the order. “While I endorse the narrow adjustments to the DE program that we adopt today, the majority falls far short of making the meaningful modifications to the DE program that were almost universally supported by commenters in this proceeding,” Adelstein said: “I am disappointed that we were unable to follow through on our tentative conclusion from earlier this year, and believe that the 2nd FNPRM we adopt today is unnecessarily broad and complicated, and significantly ignores the full and complete record before us.”
But Comr. Copps said the FCC had made significant changes to the DE program. “Today we take meaningful steps in the right direction,” he said: “We do so in time to apply new rules to the large and important AWS auction scheduled for this summer.”
The move furthers the goal of helping small business, Martin said: “We initiated this proceeding to examine our rules governing designated entities to better achieve the purpose of ensuring that small businesses have an opportunity to participate in the provision of spectrum-based services. Today’s order adopts several measures to help accomplish that goal.”
The DE action reflects an inability to gain consensus on a provision blocking DEs from collaborating with carriers based on a revenue cutoff (CD April 26 p8), a regulatory source said. The earlier rulemaking tentatively found for placing restrictions on major carriers. But the FCC couldn’t agree on a trigger point at which carriers would be barred. Martin surprised many when he circulated a plan to cut the revenue threshold to $125 million, which would have hit even small carriers. The FCC previously eyed a $5 billion limit.
“They had to do something,” the source said. “Once they decided not to go with the tentative conclusion there wasn’t much they had built a record on. There were just a few issues and that’s what they decided to move forward on.”
CTIA views the order as positive, but has concerns, it said: “We continue to be concerned about proposals in the further notice to limit the ability of DEs to partner with in-region wireless carriers and look forward to working with the FCC as it continues to grapple with these difficult and important issues.”
The Media Access Project blasted the FCC’s new DE rules, saying the Commission did nothing to push small or minority- owned firms’ purchase of spectrum licenses. The order “makes no effort to consider how changes to the DE credit program will promote Congress’ goals of promoting diversity of the public airwaves and ensuring that all Americans enjoy access to the economic opportunities made possible by advanced wireless services,” MAP said.