V. Recent Developments--Competitive Bidding for Spectrum (Auctions)
The difficulties and frustrations associated with awarding mutually exclusive licenses through comparative hearings and, more recently, through lotteries were discussed in some detail above. This frustration, together with the federal government's need for additional revenue sources, led Congress to pass, and the president to sign into law, legislation authorizing the commission to use competitive bidding or auctions in granting licenses in certain services. In the legislative history accompanying this law, known as the Licensing Improvement Act of 1993, the congressional committee in the U.S. House of Representatives with jurisdiction in the area noted that:42
Comparative hearings have frequently been time consuming, causing technological progress and the delivery of services to suffer. Lotteries engendered rampant speculation, undermined the integrity of the FCC's licensing process, and, more importantly, frequently resulted in unqualified persons winning an FCC license.... Another criticism of lotteries is that they do not reward persons who have spent money to research and develop a new technology or service. The Committee is aware of a number of instances where persons had ostensibly developed a new technology, only to see their chance to capitalize on the investment crushed by a flood of lottery applicants. A competitive bidding system, therefore, will encourage innovative ideas, and give proper incentive to spur a new wave of products and services that will keep the United States in a competitive position.
Among other things, the legislation restricts the use of auctions to the issuance of new licenses (not renewals of existing licenses) and to services that involve the resale of spectrum capacity to subscribers. The legislation also prohibits the FCC's use of lotteries for services that are eligible for auctions. The Congress expressed its intention that the FCC's regulations implementing the law should avoid excessive concentration of licenses by disseminating licenses among a wide variety of applicants, including small businesses, rural telephone companies, and businesses owned by members of minority groups or women.
Because one of the primary criticisms of the use of auctions for granting licenses is that the system might have the inadvertent effect of favoring companies with "deep pockets," the legislation allows the FCC to design alternative payment schedules for some groups. The legislation also requires the FCC to establish rules that will govern trafficking in licenses awarded through competitive bidding to prevent "unjust enrichment." Finally, the legislation establishes a series of stringent deadlines for the FCC's establishment of its rules for competitive bidding and, significantly, orders the agency to begin issuing licenses for PCS within a very short time-- by early March 1994.
On October 12, 1993, the FCC released its Notice of Proposed Rule Making to implement the competitive bidding provisions of the recently enacted legislation.43 It is beyond the scope of this paper to discuss the rulemaking proceeding and the proposed rules in any detail, but in brief, the Notice of Proposed Rule Making is organized into sections addressing three sets of issues:
With regard to the first set of issues, the FCC proposed to limit auctions to
For the second set of issues, the FCC set forth a number of alternative approaches for bidding, payment, deposits, safeguards, and bidder qualifications and eligibility, tentatively concluding that the basic bidding method should be oral bidding. However, it also sought comments on electronic bidding and sealed bidding, and on the concept of bidding for groups of licenses--characterized as combinatorial bidding. The agency also proposed a variety of ways to meet the requirements of the new law that certain designated groups--small businesses, rural telephone companies, and businesses owned by minorities and women--be given opportunities to participate in the competitive bidding process.
Because the legislation required the FCC to begin issuing PCS licenses almost immediately, the agency offered much more specific proposals for the new service. For example, it proposed to auction licenses in the largest markets first, proposed to set aside specific blocks of frequencies for the designated groups identified above, proposed specific deposits to be required from prospective bidders, and proposed both oral and sealed bids for licensing blocks of spectrum for the new service. The latter suggestion included the possibility that sealed bids could be used to aggregate licenses for smaller geographic areas, eventually permitting bidders to create a nationwide service.
At this juncture it is, of course, impossible to predict the success or failure of auctioning either as a more efficient way of assigning spectrum or as a source of revenue for the federal government. However, some very preliminary observations may be offered.
First, as is so often the case, "the devil is in the details." Lotteries, like competitive bidding, initially appeared to have great promise, but serious problems with implementation and unsavory and unexpected profiteering essentially defeated it as an alternative. Even though the FCC appears to be approaching its auctioning authority in a highly conscientious manner, the same outcome is certainly possible in spite of the agency's best intentions.
Second, the proposed departure from pure auctions in order to favor designated entities, though well-intentioned, is tricky to implement and obviously suitable for "gaming."
Third, because of some specific proposals made under the PCS heading, the writer is concerned that auctions may promote increased concentration in the industry and diminish the prospects for competition with incumbent carriers. Specifically, the concern is that incumbent carriers would have an unfair advantage because of the lower cost of capital that results from their monopoly status--the same concern that Congress alluded to in addressing the issue of deep pockets.
Fourth, and perhaps most important, auctioning is simply a faster and more efficient way of assigning licenses. By itself, it does nothing to improve the way that spectrum is allocated among services and, in the author's opinion, the costs to society of existing misallocations vastly overshadow any potential savings or other gains from more efficient licensing. Indeed, it can be argued that auctions will actually exacerbate the problems associated with efficient spectrum allocations. As observed in a recent paper, "Auctions which yield incentives for policymakers to restrict the spectrum and (equivalently) the flexibility of spectrum licenses [in order to increase revenues] would retard social welfare; indeed, this form of monopolistic output restriction currently dominates FCC spectrum regulation."44
The new legislation and the accompanying legislative history make clear the intent of Congress that the FCC make its decisions on sound telecommunications policy grounds, not on the prospect of expectation of more revenues to the treasury, but it is not clear whether the agency will be entirely insulated from budgetary considerations. Indeed, during consideration of the Budget Reconciliation Act, of which the spectrum auction legislation was a part, a bogey for the revenues that spectrum auctions were supposed to raise was widely discussed. It remains to be seen whether or not the FCC will be influenced either consciously or subconsciously by such expectations. Nonetheless, it is clear that spectrum management reform in the United States is not complete with the passage of the spectrum auction legislation.
