Economics at the FCC, 2016–2017: Auction Designs for Spectrum Repurposing and Universal Service Subsidies

Abstract

The Federal Communications Commission is responsible for federal regulation in the telecommunications and electronic media sectors, and for management of the nation’s non-federal radio frequency spectrum. During the past year, Commission economists contributed to the agency’s ongoing efforts to use market-based mechanisms—such as auctions—to allocate spectrum and distribute universal service subsidies efficiently. This includes repurposing broadcast television spectrum for more efficient use by wireless service providers through the recently concluded Broadcast Incentive Auction and structuring auction mechanisms to promote efficient allocation of universal service subsidies for the increased build-out of mobile wireless and fixed broadband service in unserved and underserved areas.

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Notes

  1. 1.

    Bidding concluded on March 30, 2017 (FCC 2017d).

  2. 2.

    The total amount of spectrum that was reallocated from broadcasting to licensed and unlicensed uses was determined by the Incentive Auction. Unlicensed and wireless microphone use is permitted in guard bands, including the duplex gap. The size of these guard bands was administratively determined. Under the Middle Class Tax Relief and Job Creation Act of 2012, Pub. L. No. 112-96, 126 Stat. 156, Title VI (“Spectrum Act”), these bands may be no larger than technically reasonable to prevent harmful interference to licensed services (47 U.S.C. §§ 1454(b)).

  3. 3.

    In a forward auction, multiple buyers (e.g., providers of mobile broadband) compete with one another for one or more items (e.g., spectrum licenses).

  4. 4.

    Multichannel video programming distributors must also be reimbursed for costs of continuing to carry the signal of a reassigned broadcaster.

  5. 5.

    (FCC 2010, p. 81). Prior to this, the concept of using a two-sided auction to repurpose spectrum was proposed by Kwerel and Williams (2002). Kwerel and Williams (1992) also made the case that spectrum was misallocated between UHF television and mobile wireless services.

  6. 6.

    The FCC adopted the term “Incentive Auction” to emphasize that broadcaster would be provided financial incentives to relinquish their licenses voluntarily.

  7. 7.

    In 1960 virtually all television households received video programming service by viewing a broadcast television station’s over-the-air signal. In contrast, in 2015 only about 11% of all U.S. television households relied exclusively on over-the-air broadcast service (as opposed to accessing broadcast stations via cable or satellite) (FCC 2017a, p. 47). Cisco forecasts that in the United States, mobile data traffic will grow five-fold from 2016 to 2021: a compound annual growth rate of 35%. In 2016, mobile data traffic grew 1.4-fold, or 44% (Cisco 2017).

  8. 8.

    Broadcasters were required to commit to a preferred relinquishment option, and could commit to additional “fallback” options, for each of their stations that participate in the reverse auction (FCC 2015c, p. 8984–5).

  9. 9.

    The reverse auction design is a based on a heuristic that tends to minimize the cost of achieving a given clearing target and keeps the high value television stations on the air. Value is assessed by standardizing bids by the broadcast volume. In simple terms, the reverse auction rejects high bids/volume and accepts low bids/volume: Stations with high bids/volume drop out early in the auction at a high clock price and are assigned a television channel. The bids of stations with low bids/volume are accepted and paid to go off the air. The volume was measured as: \(A \cdot \left( {Population\left( s \right)} \right)^{0.5} \cdot \left( {Interference\left( s \right)} \right)^{0.5}\) where \(A\) is a scaling constant, \(Population\left( s \right)\) is the number of people residing within the interference-free service area of station \(s\); and \(Interference\left( s \right)\) is an index of the number and significance of co- and adjacent channel interference constraints that station \(s\) would impose on repacking (FCC 2015d).

  10. 10.

    With digital television (DTV), UHF signals are technically superior. VHF is preferable for analog broadcasting, the technology in use prior to DTV.

  11. 11.

    A broadcaster that goes off-air will have the option of entering into a channel-sharing agreement with a broadcaster that decides to remain on the air.

  12. 12.

    The final stage rule is a reserve price with two components, both of which must be satisfied: The first component requires that (1) for clearing targets at or below 70 MHz, the average price per MHz-pop (the product of the number of megahertz associated with a license and the population of the license's service area) for licenses with potential impairments not exceeding 15% of the population (Category 1 licenses) in the top 40 markets (high-demand PEAs) in the forward auction meets or exceeds $1.25; or (2) for clearing targets above 70 MHz, the total proceeds of the forward auction exceed the product of $1.25 per MHz-pop × 70 MHz × the total number of pops (population) for the top 40 markets with at least one Category 1 block in this stage. The second component of the final stage rule requires that the proceeds of the forward auction be sufficient to meet the mandatory expenses that are set forth in the Spectrum Act. If the requirements of both components of the reserve price are met, then the final stage rule is satisfied (FCC 2015c, p. 9078–81; FCC 2015d, p. 11202–8).

  13. 13.

    The Spectrum Act provides that the forward auction must generate proceeds that are sufficient to meet the Commission’s estimate of the total relocation expenses, since the actual expenses will not be known until after the auction. The Commission’s estimate was $1.75 billion: the maximum amount that the Spectrum Act permits the Commission to deposit in the TV Broadcaster Relocation Fund (47 U.S.C. §§ 1452(c)(2)).

  14. 14.

    Paired spectrum consists of two distinct bands that are separated by a “duplex gap.” The “downlink” band is used for transmissions from base stations (towers) to mobile devices, and the “uplink” band is used for transmission from mobile devices to base stations. A paired license is composed of spectrum in each band. Unpaired spectrum uses a single band for both downlink and uplink.

  15. 15.

    For example, frequency division duplex (FDD) requires paired spectrum, while time division duplex (TDD) is used for unpaired spectrum.

  16. 16.

    The initial set of band plans that were developed by the FCC also included a 138 MHz and a 144 MHz plan. These plans were not considered in setting the initial clearing target, so as better to harmonize the U.S. and Canadian 600 MHz Band Plans (FCC 2015c, p. 8986; and FCC and Industry Canada 2015, p. 2).

  17. 17.

    The supply of auctionable licenses increased in these markets because at lower clearing targets it was possible to pack more stations in the lower part of the band, which reduced interference to wireless licenses in the highly-constrained areas on the border with Mexico. Licenses that were more than 50% impaired were not made available for auction.

  18. 18.

    International arrangements that were reached with Canada and Mexico prior to the start of the auction significantly reduced impairments at the borders and will facilitate a uniform North American 600 MHz band plan.

  19. 19.

    The Commission selected the highest possible clearing target that satisfied a limit on impaired weighted-pops (the product of the population within a license area where a wireless licensee may not be able to provide service due to interference and a price index of area-specific relative prices from prior auctions) nationwide. The limit was equivalent to the weighted-pops of one paired 5 + 5 megahertz spectrum block nationwide. This implied that the maximum permitted percentage impairment decreased with the size of the clearing target. For example, impairments were required to be less than 10% at the 126 MHz clearing target and less than 14% at the 84 MHz target (FCC 2015c, p. 9001).

  20. 20.

    The supply of licenses in the incentive auction was more complex than the typical textbook diagram. As mentioned above, the supply of auctionable licenses in Los Angeles and San Diego increased in each stage. There were other markets where supply increased, though mostly outside of the Top 40..

  21. 21.

    With large indivisibilities, examining marginal conditions may not be sufficient to make welfare conclusions (Borenstein 1988).

  22. 22.

    Spectrum holdings are measured as population-weighted average MHz holdings (FCC 2014c, p.6578, footnote 45). Note that AT&T’s contract with FirstNet to provide public safety broadband service using the 700 MHz D block gives it access to an additional 10 MHz of low-band spectrum for commercial use in certain states, with public safety services getting priority access. AT&T stopped bidding in the incentive auction as soon as it signed the FirstNet contract, which suggests that it thought that the D block was an important source of low-band spectrum.

  23. 23.

    Under a channel-sharing arrangement, two or more stations operate on the same facility and share the same 6 MHz channel. With digital technology, it is technically feasible for two high-definition (720p) streams to be combined into a single Advanced Television System Committee (“ATSC”) channel. It is also possible to broadcast up to two additional standard-definition streams without any significant reduction in the quality of the high-definition streams (Hernandez et al. 2014).

  24. 24.

    A review of this topic can be found in Aardal et al. (2003).

  25. 25.

    The Commission adopted a standard to preserve the same viewers, allowing interference from reassignments only in previously affected areas or if any newly interfering station, considered alone, would reduce a station’s population served by no more than 0.5%. Report and Order, FCC 14–50, June 2, 2014. A station might be able to broadcast to additional regions on this new channel but the new population coverage is not considered when calculating “new interference.” That is, if the station loses more than 0.5% of its previously covered population but gains 10% new coverage, it is still considered to have incurred new interference that is greater than 0.5%.

  26. 26.

    The 2012 Spectrum Act requires the FCC to make “all reasonable efforts” to preserve broadcaster coverage areas and population served in repacking those licensees that remain on the air (47 U.S.C. §§ 1452(b)(2)).

  27. 27.

    For an analysis prior to the Incentive Auction of the potential for multi-license holders to earn large rents by withholding some of their licenses and thus raising the prices that would be paid for their remaining licenses, see Doraszelski et al. (2017). Related behavior has been observed in electricity auctions; for an example see Joskow and Kahn (2002).

  28. 28.

    This analysis was conducted by Karla Hoffman, Rudy Sultana, Tony Coudert, and Brian Smith: the on-site operations-research contractors on the NCI optimization team.

  29. 29.

    We used inter-service interference (ISIX) data to calculate the amount of impairments that would result if broadcast stations remained on their original channels.

  30. 30.

    Hazlett proposed that the band be divided into nationwide licenses of 42 MHz each. To compare his proposal to the incentive auction that cleared 70 MHz of wireless spectrum, as a thought exercise we could create two overlay licenses for this spectrum: one 30 MHz and the other 40 MHz.

  31. 31.

    Channel 37 is allocated for Radio Astronomy and Wireless Medical Telemetry and does not need to be cleared. The Commission established a 3 MHz guard band between channel 37 and wireless broadband base stations to protect channel 37 services from harmful interference (FCC 2014c, p. 6864).

  32. 32.

    Public safety incumbents had the right to stay for 5 years, after which they could be involuntarily relocated if requested by an overlay licensee. Also, in February 1997, the Commission shortened the right to stay to 2 years for non-public safety microwave incumbents in the PCS C, D, E, and F blocks. For a fuller discussion, see Cramton et al. (1998).

  33. 33.

    Open-Market Reorganization for the Betterment of International Telecommunications Act, Pub. L. No. 106-180, 114 Stat. 48 (2000), as amended, Pub. L. No. 107-233, 116 Stat. 1480 (2002), as amended, Pub. L. No. 108-228, 118 Stat. 644 (2004), as amended, Pub. L. No. 108-371, 118 Stat. 1752 (2004) (2004 ORBIT Act Amendments), as amended, Pub. L. No. 109-34, 119 Stat. 377 (2005) (2005 ORBIT Act Amendment), codified at 47 U.S.C. § 701 et seq.

  34. 34.

    The ORBIT Act prohibits the use of competitive bidding when the spectrum is “used for the provision of international or global satellite communications services.” 47 U.S.C. § 765(f).

  35. 35.

    Satellite licensees are still subject to modest FCC regulatory fees (FCC 2017h).

  36. 36.

    Another issue that would need to be addressed in repurposing the 3.7–4.2 GHz band is that it is paired with an uplink band, 5925–6425 MHz, for earth to satellite use. Collectively, the paired spectrum is designated the C band. In clearing the downlink portion of the C band the FCC would need also to consider the uplink.

  37. 37.

    Paul Milgrom led a team of consultants who advised the FCC on the design of the incentive auction. Ilya Segal and Kevin Leyton-Brown were the two other members of that consulting team. Ilya Segal led the development of the reverse auction design. Lawrence Ausubel led a different consulting team that developed the forward auction design and the auction software platform. Melissa Dunford of the FCC managed the development and implementation of all the auction software used in the FCC Incentive Auction.

  38. 38.

    Karla Hoffman led the optimization team.

  39. 39.

    Kevin Leyton-Brown, as part of the consulting team headed by Paul Milgrom, led the development of the feasibility checker.

  40. 40.

    For example, see Hardy (1980), Röller and Waverman (2001), and Czernich et al. (2011) for economic development; Dutz et al. (2009) for consumer welfare; Crandall et al. (2007) for output and employment; Kent Jennings and Zeitner (2003) for civic engagement; Macher et al. (2016) for health; and Stenberg et al. (2009) for rural America, generally.

  41. 41.

    For smaller “rate-of-return” incumbent local exchange carriers, the Commission at the time largely maintained the existing legacy universal support mechanisms, as these constituted less than 5% of the access lines in the country. It has subsequently adopted additional reforms for those carriers.

  42. 42.

    Recognizing that some areas of the country would be particularly difficult and expensive to serve, the FCC also has adopted a framework and rules to implement a Remote Areas Fund for those areas that remain unserved with broadband after the Phase II auction.

  43. 43.

    For a general survey of this literature, see Laffont and Tirole (1993).

  44. 44.

    Mobility Fund Phase I recipients were required to offer stand-alone voice service over networks with data rates of 3G or better, with latency allowing real-time applications such as Voice over Internet Protocol (VoIP) to a minimum of 75% of the road miles in each census tract for which it wins support, calculated as the total of the road miles in the eligible census blocks in the tract. Recipients that meet the minimum coverage requirement were eligible to receive support corresponding to the percentage of road miles that are covered, up to 100%. Further, recipients were required to demonstrate that they offer supported services at rates that are comparable to those in urban areas for a period of 5 years after the date of award support (FCC 2012, p. 4736–8).

  45. 45.

    The definition of unserved was based on whether—for a particular census block—the centroid (or roughly the center point of the block) was unserved by 3G or better based on the American Roamer (now called Mosaik) data that were most recently available at the time for this purpose. For example, if the centroid of the block was not covered by 4G, the whole block was considered to be unserved by 4G.

  46. 46.

    Except in Alaska, where bidding was on a census block level.

  47. 47.

    Road miles were based on data that were available from the U.S. Census Bureau.

  48. 48.

    There were 14,245 bidding areas: 6099 Census Tract-level aggregations of eligible Census Blocks, and 8146 individual Census Blocks in Alaska (FCC 2013).

  49. 49.

    The ending rule allows for skipping over certain bids that, although offering a winning price per road mile, would violate the budget constraint due to the number of road miles proposed. Therefore, some groups of bids submitted at the same price were not awarded in full because assigning all would have exceeded the budget. In addition, a bid for an area may not have been awarded because a bid for the same area was awarded at a lower price per road mile.

  50. 50.

    In general, a second-price rule would determine a winner based on the lowest bid, but award support at the bid price of the next-lowest bidder. See Vickrey (1961) for the original article. See Clarke (1971) and Groves (1973) for generalizations to multiple items.

  51. 51.

    In other contexts, the Commission has determined that a second-price rule is appropriate. For example, the assignment phase of the forward auction of the Incentive Auction used a second-price rule to assign specific frequency blocks to winners of generic blocks, and the Commission has proposed to use a Vickrey auction to distribute certain toll-free numbers. In both of these cases, the item being assigned is arguably more homogeneous than in the MF I case.

  52. 52.

    Winning bids totaled $299,998,632.25, which accounted for essentially all of the budget. Subsequent defaults for various reasons later resulted in additional unspent MF I funds.

  53. 53.

    The Tribal Mobility fund assigned $49.8 million of the $50 million budget.

  54. 54.

    There was a penalty for defaulting on the bids, and the bidders had to pay back any disbursed support.

  55. 55.

    The CAF standard at the time was 4 Mbps download and 1 Mbps upload. Subsequently, the Commission increased the minimum to 10/1 Mbps (FCC 2014f, p. 15,655–6).

  56. 56.

    The “very high” standard required providers to deploy a network capable of delivering 100 Mbps downstream/25 Mbps upstream, while offering at least one service plan that provides 25 Mbps downstream/5 Mbps upstream to all locations and usage that is similar to urban areas. Both the “very high” and minimum standards required recipients to provide pricing that is comparable to urban areas, and latency no greater than 100 ms (ms). The minimum standard required 10/1 service to all locations, with a minimum usage of 100 GB. The extremely high-cost experiment required minimum standards, although with a relaxed latency requirement.

  57. 57.

    The decision to rank bids strictly on cost effectiveness differed from suggestions in the Tech Transitions Order, which set forth multiple potential criteria, including: “the extent to which the applicant proposes to build robust, scalable networks”, which would involve setting different weights for meeting higher performance standards; whether the applicant proposed an innovative strategy for leveraging non-Federal governmental sources of support; and whether the proposal would offer high-capacity connectivity to Tribal lands. All of the alternative suggested evaluation criteria would have involved additional decisions on how to measure the relevant factors and how to weight them in the numerical ranking, which would have added significant complexity to the proceeding.

  58. 58.

    Entities were required to submit technical and financial information, including most recent audited financial statements; a description of the technology and system design that would be used with a network diagram certified by a professional engineer; a description of available spectrum access where appropriate; a letter from an acceptable bank committing to issue an irrevocable stand-by letter of credit; and documentation of their eligible telecommunications carrier (ETC) designations. Only eligible telecommunications carriers (ETCs) that are designated pursuant to section 214(e) of the Communications Act of 1934, as amended, “shall be eligible to receive specific Federal universal service support.” (47 U.S.C. §§ 214(e), 254(e); see also 47 C.F.R. § 54.201(a)).

  59. 59.

    The proposed reserve price for each census block group would be the sum of the support amounts that are calculated for each eligible census block in that census block group. For each census block, the support amount would be the sum of the average per-location cost, calculated using the CAM, for the locations in the block, subject to a cap on extremely high-cost locations.

  60. 60.

    Winning bidders would be obliged to provide service at reasonably comparable rates for the term of support, at the speed and usage allowance and latency that correspond to the weight that is specified in the winning bid (FCC 2017b, p. 1628).

  61. 61.

    As proposed, for a given area and a given performance tier and latency combination, the annual support amount that corresponds to any percentage \(PP\) would be calculated using the following formula:

    \({\text{Implied support}} = {\text{min}}\left\{ {R, \left( {\frac{{PP - \left( {T + L} \right)}}{100}} \right)R} \right\},\)

    where \(R\) denotes the area’s reserve price; \(T\) denotes the tier weight; and \(L\) denotes the latency weight.

  62. 62.

    Note that under these assignment procedures, bids would be awarded based strictly on the bid percentage, not taking into account the varying impact on the budget of providing support to a given area at different performance tiers and latencies. The varying impact on the budget of bids at different performance tiers and latencies does matter in determining when the budget clears, however.

  63. 63.

    Section 54.307 of the Commission’s rules, which is also known as the “identical support rule” (47 C.F.R. § 54.307).

  64. 64.

    MF II will replace frozen legacy CETC support as of the end of the auction for mobile carriers that win MF-II support, and carriers that currently receive legacy support that do not win MF-II support will have their legacy support phased down to 2/3 of what they were receiving as of the end of auction for the next 12 months, and again reduced to 1/3 for the 12 months beginning a year later.

  65. 65.

    For the purposes of MF II, the Commission defined “qualified 4G LTE service” as mobile wireless service that is provided with the use of 4G LTE technology with download speeds of at least 5 Mbps (FCC 2017c, p. 2173).

  66. 66.

    This does not count Alaska, as Alaska is being handled in a separate program.

  67. 67.

    Since 2011, private investment—supplemented by MF I support—has led to the extensive provision of mobile voice and broadband services throughout the country. Recent analysis indicates that (excluding Alaska) 84.2% of square miles have access to 4G LTE mobile broadband coverage from at least one service provider. (WTB 2016, p. 17, Table 3-ii).

  68. 68.

    4G LTE deployment for MF II purposes is further defined by download speeds of 5 Mbps at the cell edge with 80% probability and a 30% cell loading factor (FCC 2017f, p. 6296).

  69. 69.

    The subsidy might be the difference between making the area profitable or unprofitable for the carriers to remain deployed: thus, in the case where all providers are subsidized in an area, removing all of the subsidies might potentially remove all of the carriers.

  70. 70.

    Eligible areas that do not receive support through the auction are subject to a phase-down in support for a limited period of time (FCC 2017c, p. 2182).

  71. 71.

    The USF/ICC Transformation Order asked if reserve prices should “…, for instance, be set using the results of a wireless model for each state” (FCC 2011, p. 18,077).

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Kwerel, E., Sanyal, P., Seim, K. et al. Economics at the FCC, 2016–2017: Auction Designs for Spectrum Repurposing and Universal Service Subsidies. Rev Ind Organ 51, 451–486 (2017). https://doi.org/10.1007/s11151-017-9597-5

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Keywords

  • Broadband
  • FCC
  • Spectrum auctions
  • Two-sided auctions
  • Universal service