ASHINGTON, Jan. 24 — Taking advantage of rules intended to help the smallest telecommunications companies and bolster competition, the nation's largest wireless phone services and their partners are on the verge of winning scores of new licenses in an auction of airwaves that will enable them to expand service and move into new territories.
As the Federal Communications Commission prepares to close its $17 billion auction — the largest ever held by the government — the small companies that were supposed to have received special treatment to promote competition are complaining that they lost at the expense of giants like AT&T Wireless, Sprint PCS, VoiceStream and Cingular, the joint venture of SBC Communications and BellSouth.
Those companies have struck agreements with smaller partners that will enable them to win more than 160 licenses at a sharp discount, and by one rival's estimate cost taxpayers as much as $626 million.
Verizon Wireless, the one national wireless company that refused to form a partnership with a small company, appears likely to pay the highest price. It has surprised analysts who expected the industry to be more circumspect after the fallout from the frenzied bidding at two European auctions last year.
Verizon Wireless, a joint venture of Verizon Communications and Vodafone, has filed nearly $9 billion in high bids in 113 markets, including two licenses in New York City for a total of more than $4 billion.
The bidding has reached about $17 billion, more for the Treasury than all of the combined previous auctions of the F.C.C. In recent days, the bidding has slowed to a trickle, and because the auction ends when no new bids are submitted, officials predicted today that it would end soon.
Although it was supposed to help smaller companies get many of the 422 licenses in 195 markets nationwide, more than 95 percent of the high bids have come from the largest companies and their partners, like Dobson Communications, Salmon PCS, Cook Inlet, and Alaska Native Wireless, which, with the stronger financial backing, have been able to bid on the licenses reserved for the small players.
In each market, the auction rules set aside either one or two licenses for companies with assets of less than $500 million and gross revenue of less than $125 million in each of the last two years. And if those companies decide to bid for the licenses open to all companies, they receive a 25 percent credit.
F.C.C. officials say the rules are supposed to prevent smaller companies from being used as shams. But the rules are also not supposed to discourage larger companies from making investments in the smaller companies because telecommunications is so capital intensive.
For the small companies that have lost, there is no doubt that their bigger rivals violated the rules.
"We believe we've been topped by sham entrepreneurs," said John Rogovin, a Washington lawyer representing Allegheny Communications Inc., a small Texas company that pulled out of its bid to win a license in San Antonio after higher bids were filed by small companies in which AT&T Wireless and VoiceStream have large financial interests. The losing bidders are expected to challenge the winning alliances.
Officials at the F.C.C. said today that they would examine the structure of the companies to assure that they complied with the rules and were not actually controlled by AT&T, Sprint, VoiceStream or Cingular.
The challenges will also represent a test of the views of Michael K. Powell, the new F.C.C. chairman, who since his appointment on Monday has declined requests from reporters to discuss any issues or his agenda.
Executives at AT&T Wireless, Cingular, Sprint, VoiceStream and their smaller partners either declined to comment or said that they were confident that the small companies complied with the auction rules.
The major wireless carriers have been eager to expand their coverage nationwide and increase their capacity in crowded urban markets, where cell phone customers experience the frustrations of interrupted calls and busy signals because of the overcrowded airwaves.
As it now stands, Verizon will win the most licenses, but at a heavy cost. Its two licenses in New York City, for example, will cost a total of more than $4 billion. The high bid for a third license in New York, almost $1.5 billion, has been submitted by Alaska Native Wireless, one of those small companies that have been criticized because its rivals view it as a front for AT&T.
Compared with other wireless spectrum auctions abroad, the price paid by Verizon has struck analysts as unusually high. On a per-customer basis, the New York licenses will cost Verizon almost three times the average paid by European companies in auctions last year in Germany and Britain.
Analysts and executives said the winners in those auctions had wildly overpaid. After those auctions, the planned wireless auction in Switzerland collapsed after several participants pulled out, and Italy's auction attracted far less than expected because British Telecommunications withdrew. In France, two of four bidders withdrew today. [Page W1.]
"If you look at just the price paid by Verizon, it does look like it's crazy and they overpaid," said Eric Kintz, an associate partner in charge of the e-commerce and telecommunications practice at Roland Berger, a management consulting firm. "But if you look at the long-term strategic value of having a lot of spectrum in New York, that's a different thing. If they have the money to do it, it may be the right move as a longer-term investment."
Jeffrey Nelson, a spokesman for Verizon's wireless unit, said that neither he nor other executives of the company could comment on the auction while it was proceeding because the company's lawyers say that rules that prohibit collusive communications between competing bidders prevent any discussion of the auction while it is under way.
Federal officials say that they are unconcerned about Verizon's high bids and that there is no correlation between expensive licenses and increases in consumer rates. They note that wireless phone service was more expensive when the licenses were issued free and that prices are more closely related to competition than to the costs of the airwaves.
"Clearly by any measure relative to past auctions, the prices are high, but whether the winners overpaid is another question," said Hal J. Singer, an economist who has advised companies in the current auction, as well as in auctions in Australia and Germany. "Verizon did this legitimately and they are now probably kicking themselves," Mr. Singer said. "They will come out looking smart if AT&T and Cingular get disqualified for winning through shams."
Mr. Singer, who is working with Allegheny Communications, estimated that the small companies allied with the major carriers, by virtue of the 25 percent small-business credit, will cost taxpayers $626 million that the Treasury would otherwise have without that credit.
