FCC, Dish DE Agreement About AWS-3 Credits Seen Possible, Not a Given

Dish Network designated entities SNR and Northstar and the FCC should be able to reach mutually agreeable terms over Dish's de facto control of the companies regarding the AWS-3 spectrum, after Tuesday's appellate court ruling (see 1708290012), insiders told us. "We believe an agreement can be reached and that the FCC will act in good faith," a person involved with the DEs said.

Public Knowledge Senior Vice President Harold Feld, who filed an amicus brief in the SNR appeal, said the FCC has a general bias toward putting spectrum into productive use, raising odds of it reaching a negotiated understanding rather than trying to pull back the AWS-3 licenses and starting a new auction. But he said now-Chairman Ajit Pai and Commissioner Mike O'Rielly were critical of Dish and the DEs (see 1508180062), which could complicate a negotiated resolution. New Street Research analyst Jonathan Chaplin emailed investors it's "unlikely" Dish can restructure the DE agreement to avoid de facto control and regain lost licenses at no additional cost. Experts said if the FCC, DEs and Dish can't come to an agreement, more appeals seem likely.

The U.S. Court of Appeals for the D.C. Circuit remanded SNR's appeal of the FCC order denying Northstar and SNR AWS-3 auction bidding credits (see 1509180048) to the agency Tuesday to give the DEs a chance to negotiate a solution for the "disqualifying degree of de facto control" that the court said Dish holds. Judges Janice Brown, Cornelia Pillard and Stephen Williams, in a docket 15-1330 decision (in Pacer) inked by Pillard, said the FCC reasonably looked at precedent in its control decision but should have given the DEs fair notice that their Dish relationships could cost them their auction bidding credits and allowed them a chance to remedy it.

The satellite-TV provider had contractual rights to manage almost all the DE business elements, and the DEs "faced enormous financial pressure" to sell to Dish after five years, the D.C. Circuit said. Their auction bids also suggested they were "functioning as arms of Dish" instead of as independent businesses, it said. The FCC said letting the DEs have an opportunity to cure creates a moral hazard problem of incentivizing non-compliance with DE rules, but the ruling doesn't require the FCC to permit a cure, the court said: "That choice lies with the FCC."

The Dish/DE relationship areas of concern to the FCC were laid out in the FCC's 2015 order denying the bidding credits and that order will serve as a road map for talks with the agency, a person involved with Dish said. The negotiations with the FCC likely will involve going down that list and offering amended terms or deleting conditions to the point where the agency is satisfied and the bidding credits can be awarded, the person said. The 2015 order pointed to investor protection provisions, controls over daily operations, employment decisions and what kind of access SNR and Northstar would have to their own operations and equipment under their DE agreements with Dish.

The decision, while not a clear-cut win for Dish, wasn't the definitive loss the market seemingly had expected, Wells Fargo analyst Marci Ryvicker emailed investors. She said the negotiations with the FCC could involve some spectrum going back to Dish or involve the company's current buildout requirements. Chaplin said Dish might get some relief from penalties through the ruling but it might not have a route for reclaiming relinquished licenses other than bidding for them when they again come up for auction. He also said the most likely outcome is that Dish loses the discounts.

Pai -- who supported denying the DE credits -- has the option of either defending the agency's decision and seeking en banc review by the entire D.C. Circuit or petitioning the Supreme Court, or allowing the Dish DEs to fix their applications to qualify for the bidding credits, BTIG Research analyst Walter Piecyk wrote.

The D.C. Circuit decision "is actually positive for the principles of good government," former Commissioner Robert McDowell said.​ "While the flaws of the DE program can be debated, the FCC and Dish have a second chance to negotiate in good faith to find an outcome that can get that spectrum into the hands of consumers sooner rather than after several more years of litigation."

The D.C. Circuit was right in saying the Dish/DE arrangements "were made under a great deal of business uncertainty in the face of the largest spectrum auction in U.S. history" and that SNR should have had a chance to come into compliance, the DE said in a statement. SNR head John Muleta said it anticipated working with the FCC to "promptly address the agency's concerns about the SNR's status as a designated entity and to ensure that SNR fully complies with the applicable FCC control standards." Northstar's statement "welcome[d] the opportunity to work with the FCC ... to address issues raised by the Commission."

The D.C. Circuit decision "is an important victory for American taxpayers," the FCC said. "Going forward, we need to make sure that this program is available only to legitimate small businesses that actually control their own destinies.”

One area the court didn't criticize in its decision was the auction design itself, which let Dish and the DEs bid without the agency alerting them their relationship might be problematic, said Phoenix Center President Lawrence Spiwak, who also filed an amicus brief in the D.C. Circuit appeal. "This was all changing the goal posts."