Congressional briefing on incentive auctions to re-purpose TV spectrum

On 23 May 2011, a Congressional briefing, “Spectrum Incentive Auctions: the Nuts, Bolts and Economics,” hosted by the Technology Policy Institute, focused on the economics of auctions and how spectrum incentive auctions should be structured to provide the most efficient outcomes for stakeholders.

The FCC and the Administration want to make 120 MHz of spectrum currently used for broadcast available for other, presumably higher-value, wireless uses.  Policymakers are proposing using voluntary auctions to encourage broadcasters to sell their licenses, but questions remain on how these incentive auctions would work in practice. The panelists and the presentations (in order of presentation) were:

  • Scott Wallsten, Vice President for Research, Technology Policy Institute (moderator)
  • Evan Kwerel, Senior Economic Advisor, Federal Communications Commission [Presentation]
  • Peter Cramton, Professor of Economics, University of Maryland [Presentation, pptx with animation]
  • Karen Wrege, Senior Auction Consultant, Power Auctions LLC [Presentation]
  • Lawrence Ausubel, Professor of Economics, University of Maryland [Presentation]

The event was well-covered in the trade press. Some examples are given below:

TR Daily

EXPERTS: CONGRESS SHOULD LEAVE DETAILS OF INCENTIVE AUCTIONS PLAN UP TO FCC

Congress should leave the mechanics of incentive auctions up to the FCC if it passes legislation authorizing the sales, auction experts said at a Capitol Hill event today. The experts warned lawmakers – and the Commission – against taking particular steps that they said could thwart the FCC’s hopes of reallocating 120 megahertz of TV spectrum for wireless broadband services. Several of the speakers also predicted that it would take up to two years for the FCC to complete preparation for an auction if legislation passes.

“We don’t know right now what the best way to do this [is], and we need a lot of flexibility to figure it out,” Evan Kwerel, a senior economic adviser at the FCC, said at a luncheon event sponsored by the Technology Policy Institute.

He said Congress granted the Commission such flexibility when it first authorized the agency to hold auctions in 1993, adding that the agency’s proposed plan then was “way different” than what it ended up adopting after receiving input from academic experts during “an evolutionary process.” The incentive auctions regime “will evolve through a process like it did before, which is a collaborative process” that will include consultation with industry and academia,” Mr. Kwerel said.

The other speakers at today’s event, who are experts in auction design, agreed that Congress should let the Commission set the auction rules.

“The legislation needs to be intentionally vague,” said Lawrence Ausubel, an economics professor at the University of Maryland who is also chairman and founder of Power Auctions, Inc., and president of Market Design, Inc. “There are a lot of delicate aspects of this operation, and poorly drafted legislation could simply stop this valuable program dead in its tracks.” He also said, “The FCC is very well-tuned into auction design. Congress is not.”

Mr. Ausubel offered some suggestions to lawmakers. He said the legislation should provide “explicit authority” for the Commission to hold an auction in which spectrum is both bought and sold and to relocate and repack TV licensees. He suggested the FCC could be “most vulnerable” to a legal challenge on the repacking issue. He also said the legislation should state that broadcasters that return spectrum will retain their “must carry” rights.

Peter Cramton, a University of Maryland economics professor and chairman of Market Design, suggested that there are a number of ways Congress and the FCC could hurt the prospects of incentive auctions. For Congress, lawmakers shouldn’t “impose restrictions on which broadcasters can participate in the auction,” Mr. Cramton. “That would be insane. Don’t do it,” he said. Similarly, lawmakers should not make repacking voluntary. “That would destroy the auction,” Mr. Cramton said. He also warned Congress not to “get too greedy” and try to stipulate what percentage of auction revenues must go to the U.S. Treasury.

As for the FCC, he also said it shouldn’t impose limits on stations that can participate or make repacking voluntary. He also said the FCC should ensure it addresses “competitive concerns” in the industry. Regarding the last point, he suggested the agency ensure it makes more spectrum available for unlicensed applications.

Mr. Cramton also stressed the importance of TV spectrum reallocation being a voluntary process, saying it was both more efficient as well as “politically expedient.” “The broadcast lobby has a lot of power in Washington,” he noted. Mr. Ausubel suggested the FCC could adopt “competitive preferences” in the auction to ensure it attracts smaller entrants.

Karen Wrege, a senior auction consultant for Power Auctions who managed FCC auctions for 11 years, mocked the supply and demand curves of the economists on the panel. She said broadcasters won’t need to use those to decide whether they want to sell their spectrum.

Right now, she said, “they don’t want to do this.” But if Congress passes the legislation, she said she believes stations will seriously consider if it is in their best interest. “I believe there’s a price,” she said.

But she said it is crucial for the process to be “simple for broadcasters” to understand. For example, they need to know how much they will be compensated and how repacking will work. She said the FCC should publish the repacking algorithm it uses, and ideally provide software so broadcasters can test it. The Commission should also publish pricing rules and provide software so that industry can test it. The FCC should also hold a mock auction “with a working prototype” of the repacking software, she said. “Everybody gets more comfortable when they really understand the nuts and bolts of it,” she said.

Ms. Wrege agreed that Congress should let the FCC make decisions about how the auction is designed, saying, “The legislation should leave the design details out.”

As for how long it would take for the FCC to prepare for an auction if Congress authorizes one, Mr. Cramton and Ms. Wrege suggested two years and Mr. Ausubel said 18 months to two years. Mr. Kwerel did not speculate but he said, “I don’t want to rush this thing.” He said the FCC would test the auction design first to ensure its economics were correct. He also said it might contract the auction duties to outside experts, as it has done with previous auctions.

He also provided some details of the current thinking of FCC officials on the auction’s design, which he acknowledged could change.

He said the FCC is mulling “two alternative designs” that are “essentially equivalent” in terms of the outcome.

In sequential auctions, an incentive auction would feature binding offers from broadcasters to sell spectrum and either share a channel with another broadcaster, discontinue over-the-air broadcasting, or move to an upper or VHF band channel, while a “forward” auction would feature binding bids to buy spectrum. Based on those actions, the FCC would be able to determine the amount of spectrum that could be cleared. The Commission would repack stations and winning offers would be accepted.

The goal would be to find “the least costly way to clear various amounts of contiguous spectrum” in each market, Mr. Kwerel said, which he said is “not an obvious thing.”

An alternative would be to use a double auction, in which the first three steps are done at the same time, followed by repacking, Mr. Kwerel said. He said the sequential approach is easier to do.

He also stressed that there won’t be any “mystery” about the spectrum being offered for sale by broadcasters, saying, “You’ll know everything before you actually close the deal.”

In a related development, Rep. Joseph R. Pitts (R., Pa.) wrote FCC Chairman Julius Genachowski today to ask the FCC to keep the needs of TV viewers in mind as it seeks to reallocate spectrum. “Americans should not lose reliable access to quality broadcast programming as a result of spectrum policies that could reduce viewer reception of local stations,” the congressman wrote. “Similarly, they should not lose potential services because of new spectrum taxes on local stations.” – Paul Kirby,paul.kirby@wolterskluwer.com

CommDaily

Economists Say ‘Flexible’ Incentive Auctions Law Would Give Best Return

Congress should be vague in legislation authorizing voluntary incentive auctions at the FCC, said commission and outside economists and consultants at a Technology Policy Institute lunch Monday.

While the economists opposed forcing broadcasters and other holders to give up their spectrum, they said

it’s not a good idea also to make the repacking process voluntary. Some urged the FCC to address competition

in auction rules due to increasing consolidation in the wireless industry.

“We don’t know right now what the best way [is] to do” voluntary incentive auctions, said FCC

senior economic advisor Evan Kwerel. “We need a lot of flexibility [from Congress] to figure it out.”

The commission will develop rules through a “collaborative” process taking into account views of industry

and academics “to get the best design that meets the objectives that Congress sets for us,” Kwerel said.

The FCC understands auctions and is best suited to make the rules, said Karen Wrege, senior auction

consultant for Power Auctions. “The legislation should leave the design details out.” Lawrence

Ausubel, economics professor at the University of Maryland, agreed: “It’s not only easier to write vague

legislation; it’s also better. … There are a lot of delicate aspects of this operation, and poorly drafted legislation

could simply stop this valuable program dead in its tracks.”

Congress could “screw up” if legislation imposed restrictions like requiring certain types of stations

to maintain over-the-air broadcasts, said Peter Cramtom, an economics professor at the University of

Maryland. Another mistake would be to specify a percentage of auction proceeds going to the U.S. Treasury,

he said. That could “cause enormous harm” because it may force the government to withhold spectrum

from the market just so it can meet the percentage. “Since we don’t know what the supply and demand

curve looks like, Congress is in no position to make a judgment about what fraction of the revenues

should go to the Treasury,” he said.

While giving up spectrum should be voluntary, repacking should be mandatory, the economists

agreed. “It accomplishes absolutely nothing if some broadcasters express a willingness to clear and we’re

left with a checkerboard of spectrum,” said Ausubel. The FCC already has authority to force TV stations

to move “as long as they give them an equivalent channel,” Kwerel said. But Ausubel suggested placing

explicit FCC repacking authority in voluntary auctions legislation anyway. “That seems like the most vulnerable

spot where there could be lawsuits,” he said. “While I believe they already have this authority,

who knows what the court of appeals will think.”

Broadcasters will give up spectrum for the right price, said Wrege. Some broadcasters right now

may say they oppose incentive auctions “at any price” because they don’t want to move, she said. “But if

COMMUNICATIONS DAILY—8 TUESDAY, MAY 24, 2011

Congress passes this … it provides an opportunity for broadcasters to really decide whether or not it’s

worth it, whether or not there’s a price at which they would rather not do over-the-air broadcasts,” Wrege

said. “I believe there’s a price.” To encourage broadcasters, the auction process must be simple and spectrum

holders must know they will be compensated, she said.

Legislation should include a “must carry” clause saying broadcasters who give up spectrum will

not lose their right to be carried on cable and satellite networks, Ausubel said. “If anything is done to

make broadcasters hesitant about participating, it’s the fear that giving up over-the-air broadcasting is going

to have the result of forfeiting their must-carry rights on the vehicles with which people actually watch

their shows,” cable and satellite, he said.

“Basic economics” says that an AT&T/T-Mobile combination would reduce the amount of money

that Verizon and AT&T will pay for spectrum in auctions, Ausubel said. “They’re going to bid less because

there are fewer of them,” he said. To counter that, there could be “greater reliance on reserve prices in the

auction than there was in the past” and “greater need for competitive measures to encourage active bidding by

a third and fourth firm,” he said. Cramtom agreed that the FCC should address competitive issues in its auction

rules. Two carriers owned most 700 MHz spectrum, he said. “We need to have more than a duopoly.”

The FCC process to make incentive auction rules could take two years, said Cramtom and Wrege.

Kwerel refused to guess a time frame, but said the FCC will go through its normal rulemaking process. “I

don’t think we want to rush this thing,” he said. The FCC doesn’t want to be “dilatory,” but “it takes time

to do things quickly.” — Adam Bender

Politico

ECONOMIST GOES AFTER BROADCASTERS — University of Maryland economics professor Peter Cramton criticized broadcasters Monday for resisting an FCC spectrum auction, saying he hasn’t seen over-the-air TV in 25 years.

“Let’s look at the value of over-the-air TV broadcasts. They’ve been on exponential decline since about 1985. More and more consumers are getting their TV via cable and satellite. The college students, they get it through the Internet, by and large. They don’t have TV sets,” Cramton said at a Technology Policy Institute Hill event on spectrum auctions. “The value of mobile broadband is growing exponentially. It’s very obvious to everybody. Don’t believe it for a minute when a broadcaster says (an auction) is a bad idea, and that broadcast over-the-air TV is absolutely wonderful.”

‘KEEP IT SIMPLE FOR BROADCASTERS’ — Auction consultant Karen Wrege defended broadcasters’ skepticism. “Broadcasters must fully understand how they will be compensated,” she said at the event. “Why would I participate if there is some unknown? I need to know that I’m going to get my bottom line.” She urged the FCC to publish its repacking algorithm and provide software for broadcasters to test.

SPECTRUM AUCTION TEST MAY BE ON HORIZON — Wrege suggested the FCC conduct a “mock auction” with a working prototype of repacking software to give broadcasters a better idea of what an auction would look like. She also told the FCC to consider doing a pilot project, or at least test the auction in a laboratory. FCC economist Evan Kwerel seemed to agree — he later said the agency would likely do some “experimental testing” while designing an auction.

A post by Rahul Gaitonde, Deputy Editor, BroadbandBreakfast.com

WASHINGTON May 24, 2011 – The Technology Policy Institute assembled auction experts Monday to discuss the value and mechanics of proposed spectrum incentive auctions.

“Markets work best when there are rules for the market players to act within,” said Peter Cramton, Professor of Economics, University of Maryland. “Increasingly people are getting their television service through cable and satellite making the mobile broadband market a much more valuable use for the spectrum currently held by television broadcasters.”

Voluntary incentive auctions would allow current spectrum owners to auction of part or all of their spectrum holdings and obtain a part of the proceeds.

Cramton said that any auction would allow for three possible actions on the part of the broadcasters; keep their entire spectrum holdings, sell a portion of their holdings or sell their entire holdings.

According to Cramton many broadcasters could sell half their holdings and still maintain a robust broadcast area. Using multicasting technology, broadcasters could share a single channel allowing them to transmit up to two high definition signals or five standard definition signals.

“The broadcasters do not want this right now; they feel as though they have just been forced to be moved under the DTV transition,” said Karen Wrege, Senior Auction Consultant, Power Auctions LLC. “But they will sell their holdings for a price. They know the value of their spectrum and will be able to determine through the auction if it’s worth holding on to or selling.”

Moving spectrum licenses for the purposes of improved management and better uses is not new, according to Wrege. The practice has occurred since the Federal Communications Commission began managing the radio spectrum. She also called on the Commission to ensure that the auction process is transparent, with well-established rules.

To improve the auction process, Wrege suggested that the FCC conduct a mock auction with possible participants to test out the proposed rules.

Evan Kwerel, Senior Economic Advisor at the Federal Communications Commission, approved of Wrenge’s suggestion saying that it is likely that before any auction occurs the commission will conduct a number of mock auctions in the lab.

Kwerel went on to say that, while the issue of spectrum auctions is being talked about as a quick solution to the spectrum crunch, the actual auctions would not take place for a while. The FCC – while proficient in auction design – will take many months to study the issue before any rulemaking occurs. Additionally, the comment period alone would last months.

Other panel participants estimated that it would take the Commission nearly two years from Congressional approval of auction legislation to when the auction would occur.

Lawrence Ausubel, Professor of Economics at University of Maryland called the auction a possible solution for the increasing market concentration occurring in the mobile broadband market.

“One of the primary reasons why AT&T is buying T-Mobile is to acquire more spectrum since they cannot buy it in the open market,” Ausubel said. “The auction will create a large amount of supply which will allow for the possibilities of new entrants.”

Cramton supported the idea that the auction would allow for increased competition, but observed that in most developed countries there are only three or four major operators with a handful of regional options.

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