Dish took advantage of discounts intended for small businesses to save $3.3 billion in an auction of public airwaves, making a "mockery" of the small business program, according to a member of the Federal Communications Commission.

Dish used companies it owns in order to place $13.3 billion worth of winning bids in an auction of wireless airwaves that can be used for cellular networks. Results of the auction were announced last week. But Dish only has to pay $10 billion because it didn't place the bids directly. FCC Commissioner Ajit Pai called upon FCC Chairman Tom Wheeler "to immediately launch an investigation into these multi-billion dollar subsidies."

"[T]wo companies in which Dish Network has an 85 percent ownership stake claimed over $3 billion in taxpayer-funded discounts when purchasing spectrum in the AWS-3 auction," Pai said in his call for an investigation today. "Those discounts came through the FCC’s designed entity (DE) program, which is intended to make it easier for small businesses to purchase spectrum and compete with large corporations. Dish, however, has annual revenues of almost $14 billion, a market capitalization of over $32 billion, and over 14 million customers. Its participation makes a mockery of the DE program."

Last year, I warned that @FCC's loosening of small business rules would be disaster. I didn't know I'd be this right. http://t.co/RMn8NyMTlO — Ajit Pai (@AjitPaiFCC) February 2, 2015



The commission needs to reform its rules "by closing loopholes that allow big businesses to rip off the American people to the tune of billions of dollars," Pai said.

Dish offered this response when contacted by Ars: “We respectfully disagree with the criticism of the Designated Entity program, and we are confident that we fully complied with the DE rules in the AWS-3 auction, which were unanimously approved by the full Commission. The DE program has been successful in providing much smaller entities the ability to access stronger capital structures, which has facilitated their meaningful participation in an auction process from which they would otherwise be precluded. Our approach—publicly disclosed ahead of the auction—was based on DE investment structures that have been approved by the FCC in past wireless spectrum auctions, including structures used by AT&T and Verizon."

We contacted Wheeler's office and got a response from an FCC spokesperson. "The Commission takes seriously its obligation to provide bidding credits only to those entities that are eligible to receive them," the statement said. "Existing FCC rules mandate that before awarding any license or bidding credit, the Commission conduct a thorough review of every provisional winner to ensure compliance with eligibility rules. For 20 years, the Commission’s competitive bidding rules have provided flexibility to enable a wide variety of applicants—including small businesses—to participate in the auction process, while including safeguards to protect the integrity of its auction program. As part of the auction closing process, the FCC will carefully review winning bidders’ applications before awarding any bidding credits.”

The FCC spokesperson also said that the commission did not loosen its bidding rules last year. The Commission granted a limited waiver prior to the auction, but no winning bidders used it.

An FCC official also told Ars, "As someone who cut his teeth in the Office of the General Counsel, Commissioner Pai should know FCC rules mandate an investigation into every winning bid to ensure they do not violate the rules. At the very least his Chief of Staff Matthew Berry should know the rules since they were last modified on his watch [in 2006]. So either they are playing fast and loose with the truth or they simply don’t know their stuff."

Pai is one of two Republicans on the commission, which has a three-member Democratic majority led by Wheeler.

The auction will bring in $41.3 billion, with AT&T leading the pack at $18.2 billion and Verizon Wireless bidding $10.4 billion. $7 billion will be used to build a nationwide public safety wireless broadband network. Another $415 million will go toward public safety communications research and grants for 911 systems. More than $20 billion will be used to pay down the national deficit. Money is also needed to relocate federal systems to new spectrum.

In 2012, Dish got FCC approval to build a cellular network on spectrum previously allocated to satellite services, but the satellite TV and Internet provider's plans for the cellular market are still unclear. Some analysts speculate that Dish could build out a cellular network and sell capacity to carriers on a wholesale basis.

Barring a partnership between Dish and smaller carriers, the results of last week's auction won't do anything to break the AT&T/Verizon domination of the cellular market. Sprint did not bid and T-Mobile had winning bids of $1.8 billion. Sprint and T-Mobile seem to be saving their money for an auction next year that will provide coveted low band spectrum, which can help cellular networks send signals over long distances and through building walls. Wheeler wants to impose bidding restrictions that reserve spectrum for smaller carriers, a move Pai has criticized, saying it would allow small businesses to buy spectrum at a discount and then lease it to the biggest carriers.