Transitioning to a Market Allocation of Spectrum

1. Transitioning to a Market Allocation of Spectrum Evan Kwerel Office of Strategic Planning and Policy Analysis Federal Communications Commission Spectrum Policy in Guatemala and Latin America Francisco Marroquin University Guatemala City, Guatemala June 9-10, 2005

2. Disclaimer • The opinions expressed in this talk are those of the author and do not necessarily represent the views of the FCC or any other members of its staff. • Talk is based on joint work with John Williams. Evan Kwerel

3. Traditional Structure of Spectrum Rights • Limited to specific uses (broadcasting) • Limited to specific technologies (no cellular in 700 MHz guard bands) • Limited to specific users (defense, public safety, education) • Some spectrum not available to any users (“white space” where not area-licensed) • Fragmented in geographic and frequency domains Evan Kwerel

4. TV and DTV Stations that Encumber Channel 67 in EAG-1 Evan Kwerel

5. Evan Kwerel

6. Property Rights Model • Markets determine spectrum use and users • Exclusive licenses, clear rights and obligations • Exhaustively assigned (all areas, all spectrum) • Rights easily transferable, divisible, aggregatable • Flexible choice of services and technology • Competition in market for spectrum Evan Kwerel

7. Transition: Assigning “White Space”Flexible Overlay Licenses Exhaustively assign area-wide blocks with interference protection for incumbent uses: “license the Swiss cheese, protect the holes” Licenses should be exclusive, flexible and transferable Define interference limits between overlay licensees in terms of out of band emissions, out of area emissions and in band power limits Protect incumbents against actual interference by setting limits on overlay licensees emissions at incumbents’ receivers Evan Kwerel

8. Transition: Alternative Policies Towards Incumbents • Give incumbents the right to stay • Limited to current narrowly defined rights (but if cleared license dissolves into flexible overlay licenses), OR • Provide for flexible rights on spectrum currently encumbered (OPP WP No. 27, 1992) • Give incumbents right to stay, but provide incentives to leave • “Big Bang” proposal (OPP WP No. 38, 2002) • Require incumbent to move after some time • With compensation (by whom & how much) • By overlay licensees – PCS model (JLE, Oct. 1998) • From auction revenues – voucher proposal, AWS trust fund • Without compensation – microwave on DBS, DTV? Evan Kwerel

9. Big Bang: FCC Auction that Includes Incumbent Licenses • Simultaneously auction spectrum voluntarily offered by incumbents together with any unassigned spectrum. Use package bidding. • Participants • Get immediate flexibility • Can keep the proceeds from the sale of their licenses • Can buy back their licenses at no net cost – but can’t resell immediately • Non-participants • Do not receive full flexibility for significant time (e.g., 5 years) • Allowed to continue current operations Evan Kwerel

10. Vouchers: FCC Auction with Vouchers for Incumbents • Incumbents given auction vouchers in exchange for turning back their licenses • Value of vouchers determined in auction • Incumbents attributed spectrum quantities (MHz-Pops) based on licenses turned back • Voucher value = attributed MHz-Pops X auction prices/MHz-Pop of new licenses covering area of incumbent’s licenses Evan Kwerel

11. Vouchers: FCC Auction with Vouchers for Incumbents (cont’d) • Vouchers equivalent to cash • Can be used to pay winning bid in current or any subsequent auction • Transferable and divisible • Allows FCC to create new, fungible geographic area licenses suited to new uses – if mandatory or all incumbents participate voluntarily • No need to create licenses (geographic areas, frequencies) based on legacy rights • Bidders would bid on spectrum with certain characteristics (location, bandwidth, low power or high power), not specific frequencies, minimizing opportunity for destructive strategic behavior in auction Evan Kwerel

12. Pros and Cons: Big Bang • Pro: Incumbents can maintain status quo – “voluntary” • Pro: Uses “simple” one-sided auction mechanism • Con: FCC must define area licenses that approximate initial spectrum rights • Difficult, especially when encumbered areas overlap • May not be able to define usable area licenses based on incumbents rights for certain services, e.g. microwave • Allows bidding only on specific frequencies (not fungible rights). Evan Kwerel

13. Pros and Cons: Vouchers • Pro: Allows FCC fresh start in defining and assigning spectrum rights • Clears entire band of incumbents • Can define new rights (geographic areas and frequency blocks) without regard to crazy-quilt pattern of legacy rights • Can design highly competitive auction for fungible spectrum rights • Minimizes strategic holdouts by incumbents to extent have liquid market for fungible rights • Pro: Uses “simple” one-sided auction mechanism • Con: Not voluntary, can’t maintain status quo Evan Kwerel

14. Possible Barriers to Change • Telecommunications lawyers and lobbyists • Diminished value of knowledge of administrative process • Incumbents with flexible spectrum (PCS, Cellular) • Some may lose from increased competition • Some may gain from lower cost of additional spectrum Evan Kwerel

15. Possible Barriers to Change • Incumbents with restricted spectrum • Principal-agent problem • “Don’t let me sell my birthright” • “Public interest” groups • Oppose “windfalls” to incumbents who clear • Treasury (OMB, Congress, CBO) • May lose revenue from increasing supply of flexible spectrum • May increase revenue from increasing value of licenses by clearing incumbents more quickly Evan Kwerel

16. Thank you! Evan Kwerel Office of Strategic Planning and Policy Analysis Federal Communications Commission Evan.Kwerel@fcc.gov