“Leave the FCC the flexibility to make sure there is efficient use of spectrum, including unlicensed spectrum, so that we can adjust to the needs of the future,” Genachowski told AllThingsD in an interview. Genachowski was in town for an event announcing winners of a contest to develop community apps that make use of government data.

The House of Representatives has passed a bill that would include something the chairman badly wants: incentive auctions that would free up badly needed spectrum for wireless broadband. However, the bill also includes a provision that would limit the agency’s authority to manage unlicensed spectrum bands, something Genachowski opposes.

At one point during the event, held at the offices of Andreessen Horowitz, I asked for the password to the venture firm’s guest network.

“That’s why we need Wi-Fi,” Genachowski said, a reference to the fact that Wi-Fi is possible only because the FCC has been able to preserve and make available unlicensed bands of spectrum.

In a follow-up interview, he talked about the need for such spectrum.

“It takes spectrum that doesn’t lend itself for the same use (as that licensed to carriers and others) and says ‘Let’s put it out there as a platform for innovaton,’ not knowing exactly what will happen,” Genachowski said. “When the FCC first did this, no one knew that it would lead to Wi-Fi.”

Unlicensed spectrum has been used, he said, to help meet the challenges of lots of groups, including those faced by the wireless carriers that have licensed spectrum, Genachowski said.

“Wi-Fi itself has gone from something that was resisted by the licensed carriers to something that is now embraced because it is such an important part of addressing demands on spectrum. Wi-Fi offload is a critical part of the system.”

As reported in March around the time the merger was first proposed, T-Mobile, a division of Deutsche Telekom, stands to gain about $3 billion in break-up fees should the deal fail to close. AT&T would also give T-Mobile certain wireless spectrum that’s not needed for the rollout of its next-generation wireless network.

While AT&T has said it plans to fight the action in court, the sudden move by the Justice Department and the fact that the Federal Communications Commission — which would also have to sign off on the deal — has yet to weigh in on it, make it extremely unlikely that the merger will ever be consummated, says James Ratcliffe, a telecom analyst with Barclays Capital in a note to clients today. He points out that, historically, when they challenge mergers in court, the agencies tend to win about 60 percent of the time.

“We believe that the deal is by no means dead, as the DOJ has stated that the ‘door is open’ for AT&T to propose remedies, but the fact that the DOJ took this strong step this early in the process makes the probability of completion much lower,” he wrote. “We now view the probability of success at 35-40%, down from our previous 75% view.”

One of the primary arguments in the complaint (the original filing is embedded below via Scribd) focuses on government and enterprise customers. Where critics of the deal would charge that the only notable competitors to AT&T and T-Mobile are Sprint and Verizon Wireless, AT&T management would rebut that Leap and MetroPCS are also players. The DOJ complaint discounts that argument, especially with regard to business and government customers. Leap and MetroPCS are really regional players, the DOJ says, and so corporations and government agencies with many offices around the country can only realistically consider national carriers, the number of which would be reduced to three were the deal approved.

“T-Mobile makes its presence felt competing head to head with AT&T and other carriers for a number of accounts, winning business in some cases and often pushing prices lower when it does not,” the DOJ’s complaint reads. “The merger’s elimination of T-Mobile as an aggressive competitor would likely result in fewer choices and higher prices for enterprise and government customers.”

And while the DOJ has drawn its legal line in the sand, it’s not the only agency yet to be heard from. The Federal Communications Commission would also have to sign off on the deal for it to be approved. Its chairman, Julius Genachowski, issued a carefully worded statement that gives a strong hint that it will ultimately oppose the merger. “Competition is an essential component of the FCC’s statutory public interest analysis, and although our process is not complete, the record before this agency also raises serious concerns about the impact of the proposed transaction on competition,” Genachowski said.

In a conference call with reporters today, Harold Feld, the legal director of PublicKnowledge, a telecom advocacy group that has opposed the merger, speculated that the FCC will likely send the matter to an administrative law hearing, which he called “the kiss of death” for mergers. “By the time that procedure would be finished, T-Mobile would have taken its breakup fee and gone and built an entirely new network,” he said.

So on what legal basis might AT&T and T-Mobile fight the case? The DOJ is using some new market analysis techniques that haven’t been used in antitrust cases before, says Barclays’s Ratcliffe. “Traditionally, the DOJ has used regional impact analysis to study the impact of wireless mergers, and it does so here again,” he writes. “In addition, however, the DOJ is also viewing the market as being national, a comparatively new approach, which might be more open to challenge in the courts.”

AT&T CEO Randall Stephenson has promised to fight it, and continued to argue that the deal will bring real benefits to spectrum management nationwide, and create jobs. Deutsche Telekom said it will join the fight, too.

Justice-ATT-TMobile-Complaint

Reid’s plan, which is expected to come to the Senate floor for a vote today, would raise $24.5 billion over 10 years, of which $13.1 billion would be available for deficit reduction, according to the nonpartisan Congressional Budget Office.

So how does $13 billion help solve a $14.3 trillion problem? It helps fills some of the gaps by making the bill more palatable to lawmakers on both sides of the aisle. As one wireless industry lobbyist put it, spectrum auctions are in large part seen as politically neutral territory because they’re not tax increases that Republicans would oppose, and they’re not spending cuts, which so irritate Democrats.

The Reid plan is a variation of one put forth by Sen. Jay Rockefeller, the West Virginia Democrat and chairman of the Commerce Committee which oversees wireless spectrum issues. Rockefeller’s plan would have raised $6.5 billion. Both plans essentially call for setting aside a big block of wireless spectrum, known as the D Block, for public safety. It would give the FCC authority to auction off TV spectrum currently held by TV broadcasters, and pay for financial incentives to entice them to voluntarily give that spectrum up. Broadcasters are generally not inclined to give it up, however.

There’s also a spending component to the plan. The D Block spectrum set aside for public safety agencies would be used to create a national wireless broadband network that emergency officials could use during an emergency. This is an idea that’s been rolling around Washington since the 9/11 terrorist attacks.

Rockefeller’s plan calls for $12 billion to begin construction of the network, plus a few billion for research and development into additional uses for the network. Reid’s bill drops the R&D funding and cuts the construction funds to $7 billion. It’s not enough to build the network, but more of a down payment, meaning there’s a good chance that lawmakers will have to find some money to finish the job in a few years.

Reid’s bill would also direct the Federal Communications Commission auction of airwaves — currently held by government agencies like the U.S. Department of Defense — that aren’t being actively used. In addition, it would encourage TV broadcasters to voluntarily give up some of their unused spectrum for auction by offering them part of the proceeds.

What would all that spectrum be used for? The expectation is that wireless carriers like Verizon Wireless and AT&T would bid on it in order to expand their wireless broadband networks, and thus give smartphone users more bandwidth to slake their apparently insatiable digital thirst.

Just because spectrum auction revenue is neither a tax increase nor a spending cut doesn’t mean there’s no opposition. Sen. John McCain, the Arizona Republican and 2008 GOP presidential nominee, blasted the plan and called it a “cop-out” from the Senate floor. Meanwhile, Rep. Anna Eshoo, a California Democrat, told Politico earlier this week that the debt bill is the wrong place to debate wireless spectrum.

It wouldn’t be the first time that wireless spectrum has figured in the budget-balancing and deficit-reduction process. Revenue generated from spectrum auctions helped then-President Bill Clinton balance the budget in 1993 and 1997, and President George W. Bush used them to help reduce the federal budget deficit in 2005.

(Image from Harry Reid’s campaign site.)

For more on the administration’s perspective on U.S. broadband needs, watch this video of Walt Mossberg interviewing Federal Communications Commission Chairman Julius Genachowski at the D: All Things Digital conference earlier this month.