How to Rig an FCC Spectrum Auction in 5 Easy Steps

Tomorrow the Federal Communications Commission (FCC) is testifying at a House Energy and Commerce Committee oversight hearing on spectrum auctions. The hearing is focused on the implementation of the broadcast incentive auction required by the Middle Class Tax Relief and Job Creation Act of 2012 (“Spectrum Act”), though the members will likely address other issues as well, including mobile spectrum aggregation.

I expect several questions regarding the FCC’s commitment to comply with the legislation as enacted by Congress. FCC Commissioner Ajit Pai has questioned whether several of the agency’s proposals in its auction proceeding are consistent with the Spectrum Act. The FCC’s recent proceeding to consider mobile spectrum aggregation has since raised troubling new questions regarding the agency’s willingness to comply with Congressional directives regarding spectrum auctions. If the FCC adopts new limits on spectrum holdings as suggested by its mobile competition reports, Verizon and AT&T would be prohibited from bidding in the incentive auction. Contrary to Congressional intent, the incentive auction would be rigged before it even begins.

Here is how the FCC could rig the auction in 5 easy steps.

1. Recognize that Verizon and AT&T have substantial mobile spectrum holdings below 1 GHz.
2. Propose an auction of spectrum below 1 GHz.
3. Arbitrarily decide that spectrum below 1 GHz is competitively relevant in both rural and urban areas.
4. Decide that Verizon and AT&T already hold too much (or just enough) spectrum below 1 GHz.
5. Discourage dissent by basing this arbitrary conclusion on highly technical (though arguably irrelevant) “data” that “only an engineer” can understand.

But, didn’t Congress prohibit the FCC from rigging auctions? Mostly. Section 6404 of the Spectrum Act prohibits the FCC from preventing a person from participating in an auction if that person meets the technical, financial, and character requirements to hold a spectrum license. This provision was clearly intended to prevent the FCC from imposing “eligibility restrictions” in an auction. In the past, the FCC had used seemingly neutral eligibility restrictions to pick winners and losers in auctions, though it was the public that lost the most. For example, in the so-called “entrepreneur auction” completed in 1996, the FCC restricted the bidding to certain businesses and allowed them to pay 90% of their winning bids through installment payments. Most bidders defaulted on their payments, and it took nearly ten years to free the licenses from bankruptcy and reassign them to operators capable of providing service to the public. The FCC has lost a total of approximately $26 billion in auction revenue through this and similarly failed policies.

Though Section 6404 was intended to prevent bad results in the incentive auction, Section 6404 has a loophole. It says that the prohibition against eligibility restrictions doesn’t affect “any authority the Commission has to adopt and enforce rules of general applicability, including rules concerning spectrum aggregation that promote competition.” This exception gives the FCC the flexibility to adjust the amount of spectrum that can be held by any mobile provider on a band-by-band basis before every auction. If this flexibility is abused, it could become the exception that swallows the rule.

Congressional oversight will be necessary to ensure the FCC doesn’t use this exception to pick winners and losers in the mobile marketplace. If the FCC intends to distinguish among different spectrum bands when measuring spectrum aggregation, the FCC must do more than examine the technical characteristics of the spectrum. It must obtain sufficient facts and data to accurately assess the potential impact of distinctions among different spectrum bands on competition – the concern addressed by spectrum aggregation policies. Competition is primarily an economic issue, and competition rules should be based on economic analysis. Until the FCC conducts a rigorous economic analysis of the impact of differences among spectrum bands on competition, if any, it should follow its traditional practice of treating mobile spectrum the same.

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