Article by Richard Marsden, Chantale LaCasse and Jonathan Pike
Report Qualifications/Assumptions & Limiting Conditions
NERA Economic Consulting was commissioned by NTCA – The Rural Association (NTCA)1 and the Rural Wireless Association, Inc. (RWA)2 to explore the arguments for and against using smaller geographic area licenses for the Forward Auction of the 600 MHz Broadcast Incentive Auction (Incentive Auction), and any changes to the auction rules that could facilitate using smaller license areas. The primary audience for this report includes the FCC and other parties interested in the design of the 600 MHz Incentive Auction.
NERA Economic Consulting shall not have any liability to any third party in respect of this report or any actions taken or decisions made as a consequence of the results, advice or recommendations set forth herein.
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Executive Summary
The Federal Communications Commission (FCC) recently published detailed proposals for the design of the so-called Incentive Auction, which, if successful, will reallocate 600 MHz spectrum away from broadcasters, and create a new band suitable for the provision of mobile wireless services. A key component of the Incentive Auction is the Forward Auction, in which spectrum will be awarded to wireless operators. The FCC has proposed licensing this spectrum using Economic Areas (EAs) that divide the United States into 176 regions.
This paper explores the arguments for and against using smaller geographic license areas, such as Cellular Market Areas (CMAs), instead of EAs. We conclude that there is a compelling case for defining smaller areas that are more tailored to the demands of potential bidders. We also propose that the Forward Auction be conducted in two sequential bidding phases, consisting of one phase for urban areas primarily based on the EA licensing structure, followed by a second phase of bidding for rural areas, primarily based on the RSA3 licensing structure. We call this the Sequential Forward Auctions approach. It is designed specifically to address concerns about aggregation risk and implementation complexity associated with expanding the number of license areas in the Forward Auction.
The general concept underpinning the definition of a geographic area for a spectrum auction is that it should cover a population that provides a coherent economic market for deploying and offering mobile wireless services. The FCC's proposal to use EAs in the Forward Auction is strongly opposed by local operators and their representatives, who argue that EAs are too large and would create an insurmountable obstacle to them participating in the auction. There appear to be many examples of small local operators whose current footprints are a reasonable fit with CMAs but a poor fit with EAs.
Licensing spectrum using smaller license areas is associated with a number of potential benefits. It may maximize the role of the market in determining allocation, as it is more likely that all types of demand will be represented and tested in the auction. It may also best fulfill the FCC's statutory obligations to promote economic opportunity for small businesses and rural carriers, and deployment of services to rural areas, including its mandate under Section 309(j) of the Communications Act. Finally, it supports maximum granularity in determining the availability of spectrum reclaimed from broadcasters. However, there are also benefits associated with having fewer, larger licenses. This may mitigate aggregation risk for national and large regional bidders, thus giving them greater security to express the full value of their demand. Having fewer licenses may also facilitate auction implementation by reducing complexity for the auctioneer and for some bidders.
Local operators and their representatives generally prefer licensing at the CMA level, but this would mean an increase in the number of license areas from 176 to 734. Large operators oppose this change, primarily on the basis that it will expose bidders to aggregation risk. Most of the additional licenses would be rural, so we doubt this shift would greatly affect the exposure of a national bidder to failing to win a critical mass of population coverage. However, it may increase their exposure to winning an unwanted subset of their demand.
We have not identified any reason why the ascending clock auction design proposed for the Forward Auction could not be adapted to cope with many more license areas than the 176 areas that would be auctioned using EAs. It could probably be made to work for an auction of all 734 CMAs. Given the importance that the FCC and Congress attach to the Incentive Auction being a success, it is perhaps not surprising that the FCC's preliminary preference may have been to license the spectrum on the basis of larger lots. But while there are implementation risks that increase with an expansion in the number of geographic areas, for example with respect to bid submission, none of these implementation risks appear insurmountable.
Ultimately the FCC will have to decide on the approach that it believes maximizes broader benefits, even if this is to the detriment of some stakeholders. This raises two obvious questions which we explore in this paper: firstly, is there a way to constrain the increase in the number of licenses while still meeting the needs of smaller operators; and secondly, are there changes in the design of the Forward Auction that the FCC could make, so as to accommodate the interests of a broader range of stakeholders? We believe the answer to both questions is yes.
With respect to the number of licenses, we propose that the FCC explore further the proposal, currently under consultation, to "right-size" licenses using Partial Economic Areas (PEAs).4 Some form of PEAs, based on a mixture of EA and CMA boundaries, could provide a framework for the FCC to restructure the available licenses so they are more consistent with operator needs within the framework of existing geographic tier boundaries. The specific proposal for PEA boundaries submitted by CCA5 is just one of many possible approaches the FCC could take to defining this new tier level. However, CCA's proposal would likely work for some smaller operators but not for all of them. As a starting point for a more systematic analysis of optimal boundaries, we propose that urban areas (represented by Metropolitan Statistical Area (MSA) licenses) should generally be awarded on an EA basis, but that rural areas (represented by RSA licenses) should be sold separately.
With respect to auction design, there are a number of approaches commonly used to accommodate bidders with disparate demands. For example, in past auctions, the FCC has made spectrum blocks available at different geographic tier levels, and used activity rules, such as staged activity requirements and withdrawals, to manage aggregation risk. We disregard these specific measures as they are not obviously compatible with the proposed clock auction design. Another approach, supported by some national bidders, is package bidding, which could be used in a clock auction context. However, package bidding is controversial, owing to implementation complexity and strong opposition from small bidders, who fear they will be unable to compete against large package bids submitted by national bidders.
We focus on sequencing the award of available lots. Our specific proposal is for a two-phase Forward Auction. In the First Phase Forward Auction, licenses covering urban areas accounting for over 90% of the total value will be sold. The results of this auction will determine the supply scenario, based on linkages to the broadcaster Reverse Auction. In the Second Phase Forward Auction, rural areas will be sold. For the avoidance of doubt, we propose that both auctions remain part of the broader Incentive Auction, and that bidders would have the opportunity to make a single application to participate in both phases. The assignment round could take place as planned after completion of the two bidding phases.
We believe that this approach addresses concerns about participation of small bidders and the role of the market in determining allocation. By right-sizing licenses based on operator demands and sequencing the sale of rural licenses after urban ones, it should reduce aggregation risk. Sequencing the Forward Auction also facilitates an expansion in the number of licenses without increasing implementation risk. The First Phase Forward Auction has a similar structure to the single Forward Auction with EA licensing, so it should be relatively straightforward to implement. As the First Phase Forward Auction should account for more than 90% of total revenues, it is also the most material to the financial success of the broader Incentive Auction. The implementation complexity of dealing with larger numbers of licenses is limited to the Second Phase Forward Auction, which can take place after the supply scenario has been finalized.
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Footnotes
1 NTCA – The Rural Broadband Association represents nearly 900 rural rate-of-return regulated telecommunications providers. All of NTCA's members are full service local exchange carriers and broadband providers, and many provide wireless, video, satellite, and/or long distance services as well.
2 The Rural Wireless Association, Inc., formerly known as the Rural Telecommunications Group, Inc., is a 501(c)(6) trade association dedicated to promoting wireless opportunities for rural wireless companies who serve rural consumers and those consumers traveling to rural America. RWA's members are small businesses serving or seeking to serve secondary, tertiary, and rural markets. RWA's members are comprised of both independent wireless carriers and wireless carriers that are affiliated with rural telephone companies. Each of RWA's member companies serves fewer than 100,000 subscribers.
3 CMAs consist of Metropolitan Statistical Areas (MSAs), which are focused on urban areas, and Rural Service Areas (RSAs) which cover the rest of the country.
4 Wireless Telecommunications Bureau Seeks Comment on a Proposal to License the 600 MHz Band Using "Partial Economic Areas", GN Docket No. 12-268, GN Docket No. 13-185, Public Notice, DA 13-2351 (Dec. 11, 2013) ("PEA PN").
5 Ex Parte Presentation from Competitive Carriers Association to Marlene Dortch, GN Docket No. 12-268 (Nov. 27, 2013) ("CCA Ex Parte"); see also Ex Parte Letter from Competitive Carriers Association to Marlene Dortch, GN Docket No. 12- 268 (Dec. 23, 2013) ("CCA Ex Parte 2").
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