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TAP Comments on PCS Auction
from TAP-INFO Internet Distribution List
Taxpayer Assets Project
Information Policy Note
November 10, 1993
TAP Comments to FCC on PCS spectrum allocation
- FCC asked to bar incumbent telephone, cable and cellular
companies from obtaining wireless PCS licenses in their own
service areas
- FCC asked to withhold permission to aggregate licenses
together until it determines that the benefits of
aggregation (larger spectrum blocks) outweigh the
disadvantages (fewer licenses) of less competition and
diversity
- FCC asked to award some licenses on the basis of royalty or
profit sharing agreements, rather than upfront cash payments
The attached letter is the Taxpayer Assets Project comments on
the FCC's proposed rules for auction of spectrum for Personal
Communications Services (PCS).
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James Love, Taxpayer Assets Project
P.O. Box 19367, Washington, DC 20036
November 10, 1993
Mr. William Caton
Acting Secretary
Federal Communications Commission
1919 M Street, NW, 2nd Floor
Washington, DC 20554
Re: Notice of Proposed Rulemaking (NPRM) on spectrum auction,
FCC 93-455.
Dear Mr Caton:
The Taxpayer Assets Project is pleased to offer comments on
the Notice of Proposed Rulemaking (NPRM) on spectrum auctions,
FCC 93-455. We will address three points.
1. Competition and diversity will be enhanced through
restrictions on cross ownership. Telephone, cable and
cellular companies should not be able to acquire PCS
licenses in their own service areas.
The FCC can best promote competition in telecommunications
markets by adopting rules which prohibit incumbent telephone,
cable and cellular companies from obtaining licenses to operate
PCS services in their own service areas. The FCC's proposal to
allow existing cellular license holders to acquire an additional
10 MHz of spectrum, and to allow telephone and cable companies to
acquire up to 40 megahertz of spectrum, could result in cases
where the four incumbent telecommunications carriers in a given
market obtain 100 megahertz of the available 120 MHz of new PCS
spectrum.
Federal policy makers, including Congress and the Executive
branch, claim that competition will protect consumers from
excessive carrier rates. The new PCS wireless services are
supposed to be an important element of a new competitive carrier
market. Competition can hardly be enhanced if incumbent
telephone, cable and cellular companies can "own" most of the new
PCS spectrum. The recent decision by PACTEL to divest its
cellular licenses in order to allow the company to acquire a full
40 MHz of PCS spectrum is a case in point. In markets served by
PACTEL, incumbent telephone, cable and cellular companies will be
allowed to acquire 100 MHz of the 120 MHz of PCS spectrum which
is to be auctioned. Under what economic theory can this
possibility promote "competition?" Clearly there would be more
competition if all PCS license holders were new entrants in the
service area.
In our judgement, the issue of cross-ownership restrictions and
competition is so obvious, the only mystery is why will the FCC
allow cross ownership. What possible rationale can the FCC offer
other than the fact that telecommunications carriers appear to
wield more political influence than do consumers?
2. Aggregation of PCS licenses into larger blocks should only
be allowed after a finding by the FCC that such aggregation
is in the public interest.
The FCC is proposing to issue 7 PCS licenses per market, but also
to allow bidders to aggregate licenses together into larger
blocks. The only restrictions on the aggregation are the
proposed limit of 40 MHz of licenses per firm. In our previous
comments on this issue we urged the FCC to auction off PCS
spectrum in the smallest possible blocks, and then allow
aggregation, contingent upon an FCC finding that the aggregation
was in the public interest. The potential benefits of
aggregation, which may include the ability to provide some
broadband services which cannot be offered via smaller blocks,
must be weighted against the costs of aggregation, which will
include less competition and less diversity. The FCC doesn't yet
know if the smaller PCS blocks can adequately serve PCS users,
and it would be wise to allow a certain amount of experimentation
before it concludes that the smaller PCS blocks can be aggregated
into larger, but fewer licenses.
3. The FCC should allow some bidders on PCS spectrum to offer
royalties or profit shares as an alternative to upfront cash
payments.
Upfront cash payments for PCS spectrum offer a number of
appealing advantages, including the simplicity of the auction
mechanism, and the fact that the lump sum cost of the licenses
will not involve marginal costs per unit of service offered,
arguably leading to more efficient consumer prices. On the other
hand, upfront cash payments crate entry barriers, and will lead
to less competition in the auction, and we believe, a lower
present value to the public for license fees, due to the
differences between the bidders discount rates (the costs of
obtaining capital) and the government's discount rate (the
government's costs of obtaining revenue through the issuance of
government bonds).
At a minimum, the FCC should require that one Block C and one
Block D license in each market be auctioned on the basis of the
highest royalty or profit share. To accomplish this, we suggest
that the FCC offer these blocks after the initial licenses are
auctioned, and that the license holders be required to pay
upfront fees which are equal to one third or one half the winning
bids of the licenses sold for cash. That is, the second round of
licenses should be awarded to the firms which agree to pay a
fixed upfront fee, while "bidding" on the government's contingent
share of the PCS revenues.
Thank you for the opportunity to provide comments on this issue.
Sincerely,
James Love
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