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Spiwak: Mixed Signals on Spectrum Call Into Question FCC Agenda

Without question, Americans love their smartphones and tablets. However, our rapidly rising demand for mobile data has exhausted the capacity to supply it. Without more spectrum in the hands of mobile carriers, service quality will suffer and prices will rise.

Many are looking for leadership from the nation’s expert agency, but the Federal Communications Commission can’t make up its mind on how best to solve the problem, or apparently whether there really is a problem at all.

On one hand, the FCC has made spectrum exhaust a central policy priority. FCC Chairman Julius Genachowski cautioned that “Without action, demand for spectrum will soon outstrip supply. … If we don’t tackle the spectrum crunch now, network congestion will grow, and consumer frustration will grow with it.”

On the other hand, it appears that the commission is doing everything in its power to make sure certain firms, i.e., those that provide service to the vast majority of Americans, can’t acquire much-needed additional spectrum in the open market to improve their services. This policy schizophrenia casts serious doubt on the overall integrity of the agency’s deliberative process and on its purported “expertise.”

The first sign of trouble came in 2010 when the FCC approved the merger of the firm that is now known as LightSquared. The agency’s approval came with a curious “voluntary” (aka “mandatory”) commitment — LightSquared agreed that it would not resell any spectrum to the two largest commercial carriers without prior FCC approval.

Given that LightSquared’s stated business plan is to provide wholesale capacity to retail carriers, this seems odd indeed. More troubling is the fact that this “voluntary” commitment was negotiated and adopted behind closed doors on the day the order was released, so that the public had no ability for notice and comment. As a result, some lawmakers are questioning the FCC’s perceived lack of transparency related to this proceeding.

Which brings us to the AT&T/T-Mobile case. Right before Thanksgiving, Genachowski announced that the commission’s staff found that the merger would not serve the public interest and, as such, he would set the merger for administrative hearing after the antitrust case was resolved. This led AT&T to withdraw its petition and, in response, the petulant FCC to release its staff report for all to see. While space constraints prevent a detailed examination here, there are three major problems with the way the agency conducted itself.

First, the FCC is completely within its rights to set a merger for a trial-type evidentiary hearing before an administrative law judge to determine material issues of fact. In so doing, the parties can cross-examine witnesses, adhere to rules of evidence, have an opportunity for rebuttal and so forth. Since many of the more vocal industry pundits won’t qualify as experts, the debate in a hearing may, in fact, be more substantive than is typical. Where the FCC violated basic due process was to allow its staff to prejudge this hearing by drafting a plainly one-sided report where the merging parties had none of these procedural protections. Making matters worse, it is obvious that the agency hopes that the district court judge overseeing the antitrust trial will enter the one-sided report into the record and accord it great deference. Such unprofessional conduct, unquestionably pre-meditated and prejudicial, is deeply disturbing.

Second, the FCC decided to change its rules mid-stream during its review of the transaction. Specifically, the staff report notes that the agency implemented and applied, absent any opportunity for public comment, an unprecedented cut in its “spectrum screen” threshold — a 47 percent reduction the staff oddly calls a “minor modification.” In fact, that’s a major modification of a rule of general application — and the agency did it in a footnote. The fact the FCC altered the screen unilaterally without a comment period is troubling enough, but the rule change announced in the staff report was in fact implemented in an unrelated proceeding yet to appear before the full commission for a vote.

And finally, and perhaps most egregious, is the fact that despite this FCC’s constant focus on spectrum exhaust, absolutely nowhere in the staff report was spectrum exhaust mentioned. In other words, the FCC — as the expert agency — never asked the fundamental question of whether society is better off with a few firms providing high-quality 4G broadband at low prices or many firms providing limited broadband services at high prices? Instead, by its own admission, staff simply used the “traditional structural analysis used to apply the antitrust laws,” which, under spectrum limitations, is wholly inappropriate for the mobile communications market. Had staff done their homework and modeled the capacity constraint, then they would have found that spectrum exhaust turns the traditional antitrust analysis on its head — fewer, not more, firms will produce lower prices and more innovation.

The FCC has an important and legitimate role to play in reviewing wireless industry mergers. However, when an agency so abdicates its basic responsibilities to ensure procedural due process and competent economic analysis, something is dreadfully wrong. Americans deserve good government and, as such, it is time for Congress to make appropriate inquiries.

Lawrence J. Spiwak is president of the Phoenix Center for Advanced Legal & Economic Public Policy Studies.

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