Uncertainty Remains After Dish Affiliates Surrender AWS Licenses

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by Tim McElgunn

Oct. 2 — What now? That is the question following the decision by two companies to back away from spectrum they bid for in last year's AWS-3 spectrum auction. The decision came as payments came due for $3.3 billion—the amount that Northstar Wireless and SNR Wireless had claimed as small business discounts during the auction, in which they bid a total of $13.3 billion.

An FCC official told Bloomberg News that the affiliates will retain the other 505 licenses—valued at almost $10 billion—that they won in the FCC auction.

The FCC determined that the two companies did not qualify for the discounts because, it said, they were not acting as independent entities, but were instead controlled by Dish Networks.

While the apparent result of the decision is to make the licenses available for a second auction, other bidders could object that the companies' bids artificially inflated the cost of other licenses in the auction.

The FCC's rules also give it the option of offering the licenses to the next highest bidder without going through the hassle of running a second auction.

Less Risk of Challenge?

Fred Campbell, Executive Director of the Center for Boundless Innovation in Technology and former FCC Wireless Bureau chief, told Bloomberg BNA on Oct. 1, “The FCC has the discretion to re-auction the license or offer it to the next highest bidder (in descending order) at its final bid amount.”

While early reports have the FCC deciding to re-auction the licenses, Campbell said, “In this case, the FCC might face less risk if it first offered the licenses to the next highest bidder. If the next highest bidders accepted the offer, the FCC could mitigate the risk that the other auction participants will challenge the auction's validity on grounds that DISH manipulated the bidding.”

But for the two designated entities, the auction might provide a better outcome. In its letters announcing the decisions to default, the FCC says it levied interim default payments totaling $515,555,190—Northstar owes $333,919,350 against and SNR $181,635,840—representing 15 percent of the total the companies bid for the licenses they are surrendering. The companies on Thursday paid the FCC $413 million in cash which, combined with amounts already held by the FCC for license down payments, covered the default payments in full.

If the licenses are re-auctioned and the winning bids are equal to or higher than the DE's original bids, they will owe nothing further. If the re-auction bids come in below the original bids, however, the companies will be additionally liable for the difference.

Waiting for the Court

However the commission decides to proceed, the next steps will have to wait for an appeal filed by Northstar and SNR to make its way through the courts. The companies challenged the FCC decision to deny the $3.3 billion in designated entity credits. Arguments in the case before the U.S. Court of Appeals for the District of Columbia Circuit are not due until after the end of the year.

Lawrence Spiwak, president of the Phoenix Center for Advanced Legal & Economic Public Policy Studies told Bloomberg BNA that he thinks the companies have a good chance to prevail. He said that the FCC could have stopped the auction when the companies filed their applications—which indicated that Dish was backing the smaller companies—or at any point during the auction. But, Spiwak said, having allowed the auction to go forward under existing rules, which Dish and its affiliates were careful to follow, the FCC can't make changes to the rules and apply them retroactively.

“The FCC said to Northstar and SNR that you did nothing wrong, but you misunderstood the rules,” Spiwak said. Dish, Northstar and SNR Spiwak said, followed the precedent set in other cases. But he said, in the order denying the companies the DE credits, “They say in a footnote, ‘We disavow our own precedent.’ It's a serious case of a lack of regulatory credibility.”

The FCC may want to try to settle things without a second auction based on another precedent. Campbell said, “The FCC in the past—with a PCS auction—went ahead and auctioned [licenses it took back from bidders for non payment] and then had to undo the results of that auction as a result of losing a court case, and it was a real mess.”

“One could argue that it doesn't serve the public interest very well to let those licenses sit around unused for several years,” Campbell said, “if the FCC has other viable options.”

To contact the reporter on this story: Tim McElgunn in Cherry Hill, NJ at tmcelgunn@bna.com

To contact the editor responsible for this story: Bob Emeritz at bemeritz@bna.com