Use of Designated Entity Preferences in Assigning Wireless Licenses

I. INTRODUCTION The Federal Communications Commission (FCC or Commission) was granted the power to auction licenses for use of the electromagnetic spectrum in the 1993 Omnibus Budget Reconciliation Act in which Congress added section 309(j) to the Communications Act.(1) Congress mandated the new auction policy on the grounds that new telecommunications services were to be deployed quickly, but also that licenses be assigned to "a wide variety of applicants, including small businesses, rural telephone companies, and businesses owned by members of minority groups and women."(2) In general, auctions have been a faster and less costly means of license assignment than previous FCC methods. As the auction process has progressed, however, it is apparent that the mandate for speed and efficiency has clashed with the preference programs established to facilitate the diversity mandate. Specifically, in some instances, the very structure of the preference programs has encouraged entry of comparatively inefficient telecommunications providers. In turn, this has led to delay in the provision of telecommunications services to consumers. This Article attempts to isolate the delays in license allocation and in the provision of consumer services that are directly associated with the FCC preference programs for small, woman, and minority-owned businesses. This Article then estimates the consumer costs associated with those delays and compares those costs to the quantifiable benefits of the preference programs--such as subsidies to producers and enhanced auction revenues for the government. In other words, the Article constructs the framework for a social welfare analysis to assess changes in both producer and consumer welfare as well as the amount of deadweight loss--the amount that is not captured by either telecommunications producers or consumers--associated with the preference program structure. II. GENERAL FRAMEWORK OF THE FCC DESIGNATED ENTITY PREFERENCE PROGRAM The FCC adopted its initial regulations governing general auction structure on March 8, 1994. To meet its mandate of assigning licenses to a wide variety of applicants, the FCC structured the auction under the assumption that the primary impediment to participation by small businesses and minority or woman-owned firms was their lack of access to private capital markets.(3) To compensate for this lack of access, or more precisely the inability of small start-up firms to obtain low-interest financing, the FCC established a program of multitiered benefits--consisting of various combinations of government financing programs and bidding credits--for "designated" bidders. To be designated for a particular benefit package, the potential bidder had to meet certain criteria based on firm size and ownership status. A few subcategories of the designated entity status were fairly consistent across auctions. The FCC categorized designated entities by average revenues over the three years preceding the filing for auction eligibility. The most widely used categories were very small business, for those firms with average revenues of $15 million; small business, for those with revenues not in excess of $40 million; and entrepreneur, for those with revenues in excess of $40 million and not in excess of $125 million.(4) Entrepreneurs were to have no more than $500 million in gross assets.(5) This Article highlights only two of the several auctions with designated entity programs: the Regional Narrowband Personal Communications Services (RNPCS) and the Personal Communications Services (PCS) C block auctions.(6) III. DESCRIPTION OF DELAYS ASSOCIATED WITH DESIGNATED ENTITY PREFERENCES By examining the performance of the designated entities versus their nondesignated counterparts, one can compare the delays from license allocation until market deployment associated with the various program structures. Specifically, this Article examines the licensing and subsequent performance of the RNPCS firms and the licensing and subsequent performance of the designated entities in the C block versus the nondesignated entities of the A and B block auction. …