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TAP Comments on PCS Spectrum Auction
Taxpayer Assets Project
Information Policy Note
September 15, 1993
TAXPAYER ASSETS PROJECT FILES COMMENTS WITH FCC ON
PERSONAL COMMUNICATIONS SERVICES (PCS) SPECTRUM AUCTION
On Friday September 10, 1993 the Taxpayer Assets Project
(TAP) filed comments with the Federal Communications Commission
(FCC) on the proposed auction of spectrum for Personal
Communications Services (PCS). PCS is the name for a new class
of wireless telecommunications services that industry groups
claim will generate more than $200 billion in revenue by the year
2010.
TAP's comments addressed two issues, the size of the
spectrum blocks to be auctioned, and the bidding methods used to
allocate the PCS licenses.
BACKGROUND
Congress and the Clinton Administration will use auctions to
award licenses to use new spectrum that was previously allocated
to the government and other uses. Industry groups are engaged in
intense lobbying over the terms of the auctions, which will be
designed by the FCC. A key issue is the number of licenses to be
awarded in each market. PCS Action, Inc., an industry trade
group, wants the FCC to limit the number of licenses in each
market, in order to limit "excessive" competition, that would
"marginalize" PCS services. PCS Action prefers two licenses per
market, and "certainly no more than three." PCS Action, Inc. has
also argued that large blocks of spectrum (40 Mhz) are needed for
each license for technical reasons. If the large 40 Mhz blocks
are used the FCC can award no more than 3 license per market.
Other potential license holders or PCS competitors have
argued that much smaller spectrum blocks are technically
feasible, and would provide more post auction competition. MCI
and Bell Atlantic have filed comments with the FCC saying that 20
Mhz blocks are adequate, and some PCS bidders have indicated that
blocks as small as 10 Mhz may be large enough. The issue of the
size of spectrum blocks is important, since it will determine the
maximum number of licenses that can be issued in each local
market.
A second issue that has received less attention concerns the
methods used to receive revenues from winning bidders. The
government can require bidders to submit up front cash payments,
or payments over time, including royalties against future PCS
revenues.
TAP COMMENTS ON THE SIZE OF PCS SPECTRUM BLOCKS
Regarding the size of the spectrum blocks to be auctioned,
TAP said:
The FCC should allow bidders to purchase the smallest
possible blocks of the spectrum, while providing for
mechanisms that will allow bidders to aggregate or
consolidate blocks, subject to FCC approval. . .
By choosing the smallest possible blocks of spectrum to
auction, the FCC will assign the initial rights to use the
spectrum to a potentially large group of license holders,
who can be expected to consider a wider range on innovative
PCS services. However, some important PCS services may
require the larger bandwidth. The FCC can easily
accommodate this problem by allowing bidders to aggregate
and consolidate spectrum blocks, in order to offer higher
bandwidth services. The aggregation and consolidation of
spectrum blocks should be subject to an FCC finding that the
new allocation is in the public interest. This procedure
would allow more flexibility in determining the size of
allocation blocks with each market, and provide better
opportunities for smaller firms to bid on spectrum.
The initial size of spectrum blocks will be an important
decision, since it is unlikely that the FCC will "split"
licenses, even if it turns out that smaller blocks are adequate
to provide useful PCS services. By beginning with the "smallest
possible blocks," the FCC can always allow license holders to
aggregate and consolidate blocks, if the larger blocks are truly
needed. This will also allow local markets to consider a wider
range of configurations, including combinations of small and
large blocks, as PCS markets develop.
TAP CAUTIONS AGAINST BIDDING METHODS THAT RELY EXCESSIVELY UPON
UP FRONT CASH PAYMENTS
TAP also told the FCC the auction should not rely
excessively on up front cash payments. The federal government
can structure the payments on the license in a number of ways,
including up front cash payments, fixed payments spread out over
several years, or payments which are contingent on future cash
flows, such as royalties on future revenues or units of services
provided.
The PCS spectrum auction will be the largest non-financial
auction held by the federal government. But the economic value
of a PCS license will depend upon a highly uncertain cash flow
over the long period of time. If the FCC auctions the licenses
to the highest cash bidders, the government will be asking firms
to pay now for the rights to enter a business that will not be
fully developed for many years.
TAP raised two objections to excessive reliance upon up
front cash payments to auction the spectrum. First, many smaller
firms will be unlikely to raise enough cash to bid against the
larger incumbents in the telecommunications markets. Second,
bidders will discount the future "economic rents" from licenses
by a higher "discount rate" than the government's costs of
capital (the rate of interest on its bonds), leading to excessive
discounting of license revenues.
In order to promote more competition in the auctions, and
also to increase the present value of license payments, TAP urges
the FCC to consider a bidding system that combines cash payments
with payments that are contingent upon future PCS revenues, such
as a royalty on future PCS revenues. We believe that over the
long run, the government (the taxpayers) will earn more from
royalties on a mature PCS market, than it will earn from up front
cash payments for licenses.
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Taxpayer Assets Project, P.O. Box 19367, Washington, DC 20036
v. 202/387-8030; f. 202/234-5176; internet: tap@essential.org
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