Some rules may be tightened, others loosened.
The FCC is looking for expedited input about its auction rules governing Designated Entities (DEs). If you have any interest in DE-related matters, heads up: you’ve only got until May 14 to get your two cents’ worth in (and only until May 21 to file any replies).
For purposes of spectrum auctions conducted by the FCC, DEs are smaller companies that might otherwise find it hard, if not impossible, to compete with larger, well-established telecom companies in a dollar-for-dollar face-off. Committed to encouraging new entrants into the telecom universe, Congress instructed the Commission (in 47 U.S.C. §307(j)) to ensure opportunities for small businesses by, among other things, making bidding credits available to them. A bidding credit is defined by the FCC as a “percentage discount applied to the high bid amount for a license.” Practical illustration: if a bidder with a 25% bidding credit wins an auction with a bid of, say, $1 million, that bidder would have to pay only $750,000 after the credit is applied.
Last fall the FCC opened a proceeding looking to revise its DE rules for the first time in years. Among the changes it proposed: modification of the Attributable Material Relationship (AMR) rule so that DEs could lease their spectrum to non-DEs without losing their bidding credits. In response to its Notice of Proposed Rulemaking (NPRM), the FCC got an earful about not only the AMR rule but also various other aspects of the rules governing DEs.
In the meantime, the AWS-3 auction occurred. There, several entities associated with DISH Network filed ostensibly independent auction applications. While those applicants dutifully disclosed their pre-existing relationship with DISH (as required by the FCC’s auction rules), their applications nonetheless raised questions about whether those entities had acted in concert to skew the auction. Howls of protest from Capitol Hill and FCC’s 8th Floor have now led the FCC to question whether that practice might be an evil that should be prevented.
From the post-NPRM responses and the AWS-3 auction experience, the Commission is now seeking comments about a range of issues, including:
- The AMR rule. This rule currently attributes to a DE the revenues of any non-DE entity that leases any spectrum from it. The rule is obviously a blunt instrument which the FCC is inclined to revise. But suggestions submitted in response to the NPRM ranged from eliminating the rule altogether to refining it or even to making it blunter. The FCC is now trying to sort through its options, it’s seeking any helpful direction that commenters may wish to provide.
- The prohibition on joint bidding arrangements. The FCC proposes several measures that would either (a) prevent a party from having interests in multiple applications or (b) limit coordination on bidding activities among the multiple parties. Interestingly, by adopting such a rule now, the FCC might implicitly be confirming that the current rules did not prohibit DISH and its friends from engaging in the practices they used in the AWS-3 auction.
- Attribution of non-equity revenues to a DE. Under current rules, debt-financed bidding arrangements are not counted as “equity” in the applicant, presumably because they are not equity. The FCC is now considering whether debt financing provided by a spectrum-holding entity in excess of 10% of the total capitalization should cause the spectrum-holding entity’s revenues to be attributed to the DE. Along the same lines, the FCC is considering other ways that DEs with relatively minimal capital contributions would be prevented from relying on loans.
- Attribution of non-controlling relatives and directors. Under current rules, the FCC presumes that an applicant (or the owner of an applicant) is controlled by his or her stepsiblings, half-siblings, in-laws, and other rather remote relations. In real life, though, such extended family members rarely exercise any control whatsoever over an applicant’s financial affairs, if they’re involved in those affairs at all. Sometimes these distant relations are not even a part of a person’s life, yet the FCC’s rules treat them as dominating figures. Similarly, the rules treat each individual director of a company as controlling the company, even though individual directors – especially those in non-executive positions – often have no individual power to control the company. As a result of these rules, an outside director – along with her halfsister or stepbrother – is nevertheless treated as personally controlling the entire company. This is likely a particular surprise to the siblings, since their annual revenues are being attributed to a company that they may never have heard of, much less control. Doing away with this attribution is a reform long overdue.
- The attribution of personal revenues. Perhaps because an individual’s “personal” revenues, such as his salary, are pretty personal, the FCC has not treated those revenues as attributable for DE assessment purposes. Only revenues derived from companies that a person owns or controls are counted. But now the FCC is asking whether it should consider personal revenues in determining an applicant’s elibility for DE status.
- Indian tribes. Under current rules, “small businesses” affiliated with Indian tribes and Alaska Native Corporations (ANCs) do not have to count the revenues of the tribes/ANCs (other than gaming revenues) as elements of their gross revenues when they seek to demonstrate eligibility as a “small business”. The FCC (at the urging of Missouri’s Senator McCaskill) is now asking specifically whether ANC revenues should be exempted in this manner. More generally, the FCC is also asking whether its treatment of Indian tribes and ANCs remains consistent with other Federal policies.
- Deployment schedule. The FCC is considering whether the deployment schedule of DEs should be more closely scrutinized in an effort to encourage entities that receive DE credits to actually build and operate systems.
- The threshold for being awarded a bidding credit. The FCC is looking at raising the revenue thresholds used to define DE eligibility. It’s also considering whether rural telcos should qualify for bidding credits, whether a commitment to build out rural areas should earn a bidding credit, and how multiple bidding credits should be aggregated or capped if they are adopted.
- Limiting the application of the former defaulter rule. Finally, the FCC is considering narrowing the scope of the “former defaulter” rule to eliminate consideration of small or dated defaults which have long been cured. The “former defaulter” rule currently requires bidders who have formerly defaulted but who later cured the default to pay 50% more in upfront auction fees than regular bidders. The idea is that that additional burden ensures that the former defaulter will not default again. There is no empirical evidence that the increased down payment amount has resulted in fewer defaults by former defaulters, so the FCC is asking for facts in this regard. Perhaps the former defaulter rule serves no useful purpose whatsoever.
Because the FCC’s decisions in this proceeding will affect bids, bidders and bidding strategies in the Incentive Auction, it is important for the FCC to decide the issues soon. And it appears that the FCC has every intention of doing so. Again, comments may be filed by May 14, 2015 and replies by May 21. Comments and replies may be filed through the FCC’s ECFS online filing system; refer to Proceeding Nos. 14-170, 05-211, 12-268, and RM-11395.
Check back here for updates.
[Fletcher, Heald & Hildreth represents parties participating in this proceeding.]