New research on how to inject federal spectrum into private markets

by on September 10, 2015 · 0 comments

The most pressing challenge in wireless telecommunications policy is transferring spectrum from inefficient legacy operators like federal agencies to the commercial sector for consumer use.

Reflecting high consumer demand for more wireless services, in early 2015 the FCC completed an auction for a small slice of prime spectrum–currently occupied by federal agencies and other non-federal incumbents–that grossed over $40 billion for the US Treasury. Increasing demand for mobile services such as Web browsing, streaming video, the Internet of Things, and gaming requires even more spectrum. Inaction means higher smartphone bills, more dropped calls, and stuttering downloads.

My latest research for the Mercatus Center, “Sweeten the Deal: Transfer of Federal Spectrum through Overlay Licenses,” was published recently and recommends the use of overlay licenses to transfer federal spectrum into commercial use. Purchasing an overlay license is like acquiring real property that contains a few tenants with unexpired leases. While those tenants have a superior possessory right to use the property, a high enough cash payment or trade will persuade them to vacate the property. The same dynamic applies for spectrum.

Overlay licenses have been used to reassign non-federal spectrum but never federal spectrum. The paper presents new evidence from a 2006 spectrum auction (AWS-1) that suggests that billions of dollars of underused federal spectrum could be deployed more quickly than other policy alternatives. Crucially, overlay licenses allow agencies to receive payment for spectrum sales and this reordering of spectrum rights would benefit taxpayers and wireless broadband users.

Policymakers are interested in spectrum policy because spectrum availability improves broadband access and generates substantial government revenues. Further, conservative estimates place the consumer surplus losses from misallocation of spectrum at hundreds of billions of dollars per year. Therefore, policymakers should favor reform proposals, like overlay licenses, that show promise in repurposing federal spectrum relatively quickly. The paper compares two policy proposals for spectrum reform: regulation-intensive dynamic spectrum sharing and market-oriented overlay licenses.

Regulation-Intensive Approach. A 2012 President’s Council of Advisors on Science and Technology (PCAST) report promotes complex spectrum-sharing technologies to enable consumer use of fallow federal spectrum in order to avoid clearing agencies from their spectrum.

  • According to the PCAST report, widespread dynamic spectrum sharing would take decades to implement. The proposal relies on precise government planning and complex device requirements to enable intensive use of federal spectrum. However, the sharing technologies contemplated are in early development and will not be in routine deployment for many years. Social welfare losses mount quickly in the interim.
  • Despite recognizing that agencies have no incentive to improve efficient use of their spectrum, this proposal does little to encourage efficient government use of spectrum. Dynamic spectrum sharing techniques allow wasteful legacy systems to operate indefinitely, and PCAST recommends against clearing inefficient federal users.
  • Implementation of the PCAST proposal would likely degenerate into regulatory failure. Previous attempts at spectrum sharing between different wireless systems, like the TV White Spaces allocation that PCAST lauds, frequently resulted in rent seeking, severe deployment delays, and relatively few consumer benefits.

Market-Based Approach. A superior reform proposal is to auction off overlay licenses to certain federal spectrum bands. These winning overlay licensees can put unused federal spectrum into service rapidly. For the remaining spectrum that agencies are using, the winning licensee can pay the agency to vacate the bands or upgrade to more efficient systems. Agency resistance may be mitigated because agencies can negotiate compensation for selling rights to their spectrum.

  • The FCC has conducted overlay auctions in the past and they represent an “off-the-shelf” tool to reorder spectrum rights. In previous overlay auctions, the process was effective and winning bidders compensated existing users like state public safety agencies and public utilities to vacate their valuable spectrum.
  • Overlay license auctions and clearing deadlines transfer spectrum into the market and to its highest-valued uses. For example, in as few as two years after the 2006 AWS-1 auction, existing users and federal agencies vacated their spectrum, allowing carriers to invest billions of dollars into networks and deploy mobile broadband in cities like San Francisco and New York.
  • A combination of clearing federal agencies from their spectrum and using overlays to clear nonfederal users has freed about 210 MHz of prime spectrum for mobile broadband use, supplying over one third of spectrum held by mobile carriers today.

Government agencies sit on wireless spectrum worth hundreds of billions of dollars rent-free. This federal spectrum is often unused or underutilized and the misallocation of this valuable resource is socially costly. My paper proposes that Congress permit agencies to sell some of their spectrum to private parties after an overlay auction. No other reform proposal has enabled widespread consumer use and economic investment as rapidly as have overlay auctions combined with clearing deadlines. Overlays and clearing deadlines in the recent past have permitted commercial deployment of cutting-edge wireless technologies in encumbered spectrum within a few years.

Related Research
Reclaiming Federal Spectrum: Proposals and Recommendations

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