Fixing Designated Entity Program Must Be FCC Priority, MMTC Says

S. Jenell Trigg of the Lerman Senter law firm, an author of the study, told us after a press conference Tuesday that MMTC is very hopeful that the FCC under Chairman Tom Wheeler will revise the DE rules. “This white paper came out of a preliminary discussion ... when Tom Wheeler first became chair,” she said. “When a new chairman comes in there’s always a concerted effort to gauge where they are.”

Members of MMTC raised the issue with both Wheeler and Chief of Staff Ruth Milkman, Trigg said. “Basically, Wheeler said he would like to see three recommendations on how can they move the ball forward on minority ownership. This white paper was already in the works by then, but it lays the foundation for the three recommendations.” The paper doesn’t try to fix blame, she said. “I think we're past that at this point. We've got to fix the DE program moving forward. ... I think Chairman Wheeler is uniquely positioned to make a difference.”

"In recent years, ... the FCC’s DE program has become ineffective following the agency’s gradual repeal and elimination of previously existing incentives to encourage MBE participation, legal impediments, the further expansion of large incumbents, the elimination of rules and policies that limited the amount of spectrum licensed to one entity, and the impact of the FCC’s own regulatory missteps -- well-intended or not,” the paper said (http://bit.ly/1hPyXTH). “Over the course of fifty-six wireless auctions during the past 20 years, the majority of DEs that currently hold wireless licenses are incumbent rural telephone companies, very few DEs are new entrants, and even fewer DEs are MBEs.”

Rules adopted by the FCC prior to the AWS-1 auction in 2006 chilled DE participation in that auction and the 700 MHz auction that followed, MMTC argued. “Notably, the FCC doubled the ‘post-auction unjust enrichment penalty repayment period’ from five to ten years ... the time auction winners had to maintain the same ownership before assessed a penalty,” MMTC said. “The agency also imposed a 100 percent bid credit repayment obligation (plus interest) on licensees that sold their interest in their licenses during the first five years after winning an auction. The FCC also stripped DE eligibility status altogether from any entity that leased or resold (including on a wholesale basis) more than 50 percent of the aggregate spectrum capacity won at auction.” While the AWS-1 auction brought in $14 billion and the 700 MHz auction $19 billion, “DEs won only a little over $500 million [worth] in each auction,” the group said.

MMTC made nine recommendations for steps the FCC could take to increase DE participation in the upcoming auctions, but stresses three in particular, starting with eliminating the Attributable Material Relationship Rule. “DEs should be able to retain their DE status, including the value of bidding credits, without having to attribute the revenues of other firms (large or small) if they enter into leasing, wholesaling, and/or resale arrangements for more than 25 percent of spectrum capacity to one entity,” the group said. MMTC also urged the FCC to increase bidding credits to at least 40 percent, which would “help compensate for the harms caused by the 2006 DE Rules and counterbalance concentrated license ownership."

The FCC should consider diversity and inclusion in its public interest analysis of mergers and acquisitions and secondary market spectrum transactions, MMTC said: “Such analysis would ensure that there are compelling factors in the determination of whether any transaction meets the public interest standard, including MBE and [women-owned business] participation. Such documentation should also be a part of the agency’s annual Wireless Competition Report to Congress.

"Due to marketplace dynamics, long-standing market entry barriers and discriminatory practices, compounded by regulatory and legal impediments, MBE ownership of full power radio and TV stations is at its lowest in decades, and the number of MBE-owned cable systems is negligible, at best,” MMTC said. “Adopting the recommendations in this paper will help ensure that the FCC does not continue to contribute to a similarly discouraging outcome in the wireless industry.

MMTC President David Honig said the issue is huge for his group, but DE issues have sometimes languished before the FCC for years. “We're fortunate that the designated entity issues are part of the overall auction proceeding,” he said. “While it has often been the case that issues related to minority business participation have tended to not get addressed rapidly ... the fact that these designated entity issues are riding on a train that’s going to make it to the station, they're riding on the auction rulemaking, means that they're going to get addressed. They can’t be put off."

MMTC has met with each of the commissioners and the chairman, Honig said. “They're all, I think, genuinely concerned,” he said. “They're trying to get their arms around all of the issues and the intricacies.” Also helpful is that in his last State of the Union address President Barack Obama mentioned social justice, he said. “In a democratic society you can’t have vast differences in wealth,” Honig said. “Here is the prime asset of a digital society being made available by this distinguished federal agency though auction."

"It’s a tough issue for them,” said a former FCC spectrum official who isn’t involved in DE issues. “DE policies tend not to work, but it’s a hot-potato political issue. The more attention it gets, the harder it is for the FCC, that’s for sure."

Former FCC Commissioner Michael Copps Tuesday said the FCC should rework its DE program. “If the upcoming auction ends up being a transfer of public spectrum from big broadcasters to big wireless, it will be a colossal flop,” Copps said. “If we're going to do justice to minorities, women, small business, and competition, we need to be developing DE or similar rules now, not as a last-minute add-on to the auction rules, as sometimes happened in the past, but as an integral, meaningful part of them."

"It is extremely important for the FCC to make the DE program more workable for minority and women-owned businesses,” said Public Knowledge Senior Vice President Harold Feld. “The DE program is one of the few tools the commission has to encourage minority ownership, which all studies agree sits at abysmal levels. The approaching auctions represent the only good opportunity for the foreseeable future to create viable new minority-owned entrants. The FCC should look at encouraging participation by minority-owned and women-owned businesses as a priority, not an afterthought.”