In an Auction, Congress Should Trust the Market

Spectrum for Sale: FCC moves ahead with public C-band Auction

FCC Chairman Pai recently announced the Commission’s plan to move forward with a public auction to repurpose the C-band for mobile use. Current incumbents, represented by the C-band Alliance (CBA), proposed that the Commission conduct a private auction to facilitate a quick transition and properly compensate incumbents for relocating or transitioning their services out of the band. The Commission initially sought comment from stakeholders concerning, among other things, the legality of such a private auction. Pai’s proposal instead relies on a public auction, similar to the Broadcast Incentive Auction, where proceeds from the sale of spectrum to mobile carriers will be used to compensate incumbents with any residual income deposited in the treasury. Congress has considered legislation that would limit the FCC’s discretion in allocating auction proceeds, but neither proposed bill has found substantial support, most likely as neither bill is good policy. For example, by requiring that 50% of auction proceeds go to the treasury, the 5G Spectrum Act risks driving up the costs of spectrum for bidders or undercompensating incumbents. Similarly, the Spectrum Management and Reallocation to Taxpayers Act also limits the financial recovery for incumbents, potentially denying them adequate compensation for their relocation costs. Ultimately, not only is Pai’s proposal well within the Commission’s legal authority, but his auction plan will enable rapid deployment of mobile services while also adequately and fairly compensating incumbents and taxpayers.

Why the C-band is so valuable

The C-band, 500 megahertz of spectrum between 3.7 and 4.2 gigahertz, is currently used for fixed satellite services, but mobile carriers have sought this valuable mid-band spectrum as part of their plans to develop 5G. Unlike the higher frequencies used for mmWave technologies (another critical aspect of 5G), this valuable mid-band spectrum allows for longer range towers while still providing high data throughput and low latency. While mmWave will help deliver the ultra-high speeds carriers have promised to dense urban environments, mid-band allocations such as C-band will be essential to bringing the promise of 5G to rural communities.

Spectrum auctions

Since 1994, the FCC has used auctions as the primary method for assigning spectrum licenses. Unlike previous methods of spectrum assignment, such as a lottery, the auction policy allows market forces to determine the most valuable use of a particular band. To enable more seamless transition in a particular band, the Commission has used “incentive auctions”, where a band is transitioned by first offering new licenses to bidders, then using the auction proceeds to compensate incumbents for giving up their licenses or relocating their services.

For example, the Broadcast Incentive Auction cleared up spectrum for mobile use by reducing the spectrum available for broadcast television. This transition was due in part to decreased demand for over-the-air television services, and technology advances that enabled more efficient spectrum use by broadcasters. Similarly, the C-band proposal aims to take advantage of decreased demand for fixed satellite services and technology advancements to enable mobile use that has greater economic potential.

The Commission’s authority to conduct incentive auctions is codified at 47 U.S.C. § 309. While this section gives the Commission wide latitude to determine auction procedures, the outer boundaries of what exactly that auction should look like remain untested. The C-band Alliance argued for a private-run auction where the entirety of the auction proceeds would be given to the CBA, who in turn would compensate their members accordingly. While the legality of this approach has been questioned, the CBA argued that this approach avoided the potential hold-out problems of past incentive auctions. One downside of incentive auctions is because it relies on all the incumbent users giving up their licenses, it is subject to a hold-out problem. By working through a single entity, the CBA argued that the auction can be conducted more quickly, allowing the spectrum to be repurposed more quickly for 5G. However, this exercise of Commission authority would be the first of its kind, and judging by the filings of stakeholders, would likley be subject to litigation.

Perhaps responding to this confusion, legislators on the Hill sought to limit the Commission’s discretion in determining auction procedures. One bill, the Spectrum Management and Reallocation to Taxpayers (SMART Act) would cap payments to incumbents at $6 billion and provide a paltry $1 billion in incentive payments for rapid relocation out of the band. Lawmakers have yet to fully consider this proposal as it currently waits in committee. Another piece of proposed legislation, the 5G Spectrum Act, would require that 50% of the auction proceeds be deposited in the treasury, but otherwise would not limit payments to incumbents. The 5G Spectrum Act cleared the Senate Commerce Committee, yet lacked bipartisan support.

Pai’s Plan

Pai’s plan proposes to auction off the lower 280 megahertz of the C-band for mobile use, while preserving a 20 megahertz guard band to prevent interference between mobile and satellite users. The lower 120 megahertz would be cleared for mobile use as soon as September, 2021, while the remaining 180 megahertz would be cleared by September 2023. Incumbents would be offered incentive payments, potentially totaling up to $9.7 billion, if they hit these accelerated goals for relocation. In total, the payments to satellite incumbents could be up to $14.7 billion to cover the costs of relocating their services out of the band. This would include potentially launching new satellites, installing filters on existing earth stations to prevent interference, or investing in other infrastructure such as fiber connections as an alternative to satellite service.

In an Auction, Trust the Market

While Congress certainly has the authority to restrict the FCC’s jurisdiction or auction authority, the proposed bills are simply bad policy. By capping payments to incumbents, the SMART Act risks under-compensating incumbents for their reasonable costs, and ultimately substitutes the market’s judgment for Congress’s in determining the value of the spectrum. The 5G Spectrum Act remedies this problem by removing the cap, but ultimately amounts to rent-seeking behavior by regulators. Requiring that 50% of the auction proceeds go to the treasury risks: (1) driving up the price of critical spectrum for 5G, eventually passing these costs on to consumers; or (2) restricting the financial recovery for incumbents, deterring future investment in telecommunications infrastructure. While this rent could theoretically be used to fund efforts to close the digital divide by funding rural broadband, there is no requirement that this money would be used for this specific, or any related purpose. Technically, there is nothing preventing these funds from being used to pay the Secret Service’s tab for golf cart rentals at Mar-a-Lago instead of broadband deployment.

Pai’s proposal, on the other hand, allows the market to better determine the appropriate level of compensation for relocating incumbents and avoids the incentives for rent-seeking. This approach also avoids the potential legal pitfalls of the CBA proposal by conducting a public, rather than private auction. While the CBA’s proposal is theoretically faster, the novel exercise of the Commission’s authority could invite legal challenges that would delay the transition to mobile use in the C-band. This undermines the entire premise of the private auction, eliminating the collective action problem to enable a faster transition to 5G. Pai’s proposal, on the other hand, relies on a tried-and-tested auction procedure that is unlikely to be litigated, and allows for a more efficient transition to mobile services in the C-band. The FCC’s transition to spectrum auctions reflects an understanding that market forces, not regulators, should determine the most efficient use of a particular band to promote the public interest. Recognizing this, Pai’s proposal will ultimately ensure that the C-band is put towards the most beneficial use for consumers while also fairly compensating incumbents for their relocation costs.

Wilson Scarbeary is a second-year law student at the University of Colorado, focusing on technology, telecommunications, and competition policy. He spent his summer working on federal regulatory policy at AT&T, and currently works as a Policy Fellow for the Colorado Technology Association, an advocacy group that supports the Colorado technology ecosystem. Wilson is a Digital Content Editor for the Colorado Technology Law Journal, and a member of Barristers Council.

Wilson graduated from the University of Colorado with a bachelor’s in political science. In his free time, he is an avid skier and rock climber.