In a blow to Sprint (NYSE: S) and Dish Network (NASDAQ: DISH), the FCC plans to add much of their respective spectrum portfolios to its so-called spectrum screen, which will bring more scrutiny to any future spectrum transaction they engage in.

The FCC is proposing to make changes to the spectrum screen in conjunction with issuing proposed rules for the incentive auction of 600 MHz broadcast spectrum, planned for next year. Rules for both proceedings will be voted on by the FCC at its May 15 meeting. However, the rules could change before then and both proceedings have been subject to intense lobbying from all sides.

The FCC also confirmed that it is contemplating a system of reserved bidding for the 600 MHz spectrum it plans to auction to wireless carriers. Such rules likely would inhibit Verizon Wireless (NYSE: VZ) and AT&T (NYSE: T) from bidding on spectrum that would be set aside in many markets. The fight over the rules has been going on for a year, as Verizon and AT&T have lobbied vigorously against restrictions and Sprint, T-Mobile US (NYSE:TMUS), U.S. Cellular (NYSE:USM) and other smaller carriers have pushed for them.

However, the changes the FCC is making to the spectrum screen could hamper future deals Sprint wants to make--for instance its much-rumored potential deal to merge with T-Mobile. The new spectrum screen rules will only affect transactions after the upcoming spectrum auctions, for AWS-3 spectrum later this year and the 600 MHz auction, planned for mid-2015.

The spectrum screen ruling would essentially allow the FCC to count higher-band spectrum like Sprint's 2.5 GHz in its spectrum screen. Sprint had argued its 2.5 GHz spectrum--Sprint owns around 120 MHz of 2.5 GHz spectrum in 90 percent of the top 100 U.S. markets--should not be counted in the screen. But, according to a senior FCC official, the bulk of Sprint's 2.5 GHz spectrum will be added to the spectrum screen. Dish's spectrum--40 MHz of AWS-4 spectrum and the 10 MHz block of 1900 PCS H Block spectrum it recently won at auction--will also be counted.

Taken out of the screen will be the 700 MHz D Block, which is being used for the FirstNet public safety broadband network, as well as Specialized Mobile Radio (SMR) spectrum, the FCC official said.

Sprint and Dish's spectrum will be added to the screen because the FCC determined that the airwaves are suitable and available for mobile broadband use, the official said.

The FCC currently uses the screen as a factor when reviewing spectrum transactions to determine whether they are in the public interest. If a carrier acquires too much spectrum and violates the screen, the deal is more closely scrutinized. Currently, the screen is different for each proposed transaction. The FCC has been reviewing changes it should make to the screen since 2012.

The screen can trigger a more detailed competitive analysis by the FCC, and currently the trigger occurs when a wireless provider holds one-third or more of the available spectrum in a given market. The proposed changes will keep using the one-third spectrum holding factor. The proposed rules would also continue to use a case-by-case review for transactions involving spectrum below 1 GHz.

The spectrum screen changes dovetail with rules the FCC is contemplating for the incentive auction, some of which have been previously reported. The FCC is emphasizing that the incentive auction rules would make a significant amount of spectrum available to all bidders in all markets.

However, to ensure competition, the proposed rules would establish a market-based reserve of up to 30 MHz of spectrum for carriers that currently hold less than one-third of available low-band spectrum in a market. The FCC plans to auction the spectrum in Partial Economic Areas license sizes, the middle ground between large Economic Areas and smaller Cellular Markets Areas.

The FCC would then establish a spectrum reserve "trigger point" during the pre-auction process to figure out at what point the auction would split into "reserved" and "unreserved" bidding. The FCC is going to open up to comment what that rigger point will be; it hasn't been decided yet. The senior FCC official indicated it could be related to a market-based price. It could also be tied to an FCC rule that relates to the point in time at which there is an appropriate a balance of spectrum and enough money to clear broadcasters from the spectrum they are giving up.

In any case, when the trigger is reached, the amount of "reserved" spectrum in each market will be established based on demand in that market by eligible bidders, but it will be no more than 30 MHz, according to the FCC official. If demand for the reserved spectrum is less than 30 MHz at that point, the remaining balance would be available on an unreserved basis.

The FCC official said that for example, if there is 100 MHz of spectrum carriers can bid on in the incentive auction, no more than 30 MHz would be reserved for eligible bidders. However, if eligible bidders demand only 20 MHz in a given market when the trigger is met, then only 20 MHz would be reserved, and 80 MHz would remain unreserved.

The FCC said that any carrier that holds more than one-third of available low-band spectrum in a market would be able to bid on all unreserved spectrum in that market, but would be ineligible to bid on any reserved spectrum. That rule likely could ensnare Verizon and AT&T in many markets and restrict them from bidding, but could also impact smaller carriers like U.S. Cellular in some markets. The FCC also said that any provider that holds less than one-third of available low-band spectrum in a market would be able to bid on all unreserved spectrum in that market, and all reserved spectrum in that market.

"The low-band spectrum we will auction is particularly valuable because it has physical properties that increase the reach of mobile networks over long distances at far less cost than spectrum above 1 GHz. It also reaches deep into buildings and urban canyons," FCC Chairman Tom Wheeler wrote in a blog post. "Today, however, two national carriers control the vast majority of that low-band spectrum. This disparity makes it difficult for rural consumers to have access to the competition and choice that would be available if more wireless competitors also had access to low-band spectrum."

Wheeler wrote that the rules are being proposed to "prevent one or two wireless providers from being able to run the table" in the incentive auction.

"The net effect of the market based reserve, therefore, is to promote a robustly competitive auction with all parties vying to establish a fair market price," Wheeler wrote. "Only when the auction reaches the trigger point will bidders split into two groups. Those without much low-band spectrum will complete against only each other for a limited amount of reserved spectrum, and competitive bidding for unreserved spectrum will also continue for those bidders who already hold a lot of low-band spectrum."

When the rules were first floated earlier this month AT&T said it might reconsider participating in the auction. However, since then, AT&T has softened its tone.

"We have expended significant resources, not only in working with the Commission and industry in this proceeding to develop rules that maximized the chances of a successful auction, but also in supporting the underlying legislation which authorized the Commission to conduct these auctions," AT&T wrote in an FCC filing published April 24. "Our desire to participate in this auction and our hope for a successful auction is unchanged. We believe that all stakeholders will be able to work together to achieve a successful incentive auction for the 600 MHz band."

For more:

- see this FCC blog post

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