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Market Mechanisms for Redeveloping Spectrum. Evan Kwerel Office of Strategic Planning and Policy Analysis Federal Communications Commission. March 11, 2004 Harvard University. Disclaimer.

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Market mechanisms for redeveloping spectrum l.jpg

Market Mechanisms for Redeveloping Spectrum

Evan Kwerel

Office of Strategic Planning and Policy Analysis

Federal Communications Commission

March 11, 2004

Harvard University


Disclaimer l.jpg

Disclaimer

  • The opinions expressed in this talk are those of the author and do not necessarily represent the views of the FCC or any other members of its staff.

  • Talk is based on joint work with John Williams.

Evan Kwerel WP_38_Presentation.3.11.04


Only about 7 185 mhz of spectrum in 300 3000 mhz range is fully available to market today l.jpg

Only about 7% (185 MHz) of Spectrum in 300-3000 MHz Range Is Fully Available to Market Today

PCS 3%

Cellular 2%

SMR 1%

Evan Kwerel WP_38_Presentation.3.11.04


Another 15 413 mhz for flexible use in the pipeline l.jpg

Another 15 % (413 MHz) for Flexible Use in the Pipeline

Evan Kwerel WP_38_Presentation.3.11.04


Slide5 l.jpg

But…

  • Heavily encumbered

  • Fragmented in geographic and frequency domains

  • Needs massive restructuring

Evan Kwerel WP_38_Presentation.3.11.04


Slide6 l.jpg

TV and DTV Stations that Encumber Channel 67 in EAG-1

Evan Kwerel WP_38_Presentation.3.11.04


Percent of mhz pops encumbered on tv channels 60 69 in northeast eag l.jpg

Percent of MHz-Pops Encumbered on TV Channels 60-69 in Northeast EAG

C

D

Evan Kwerel WP_38_Presentation.3.11.04


Slide8 l.jpg

Three or More TV Stations Encumber Parts of All Blocks in the 700 MHz Band in NYC

Channel 59-69 TV Incumbents Within 100 Miles of New York City

747

752

762

777

782

792

806

746

C1

D1

PS

C2

D2

PS

59

60

61

62

63

64

65

66

67

68

69

WBNE

WRNNTV

WHSPTV

WHSETV

WBPHTV

WMBCTV

WHSITV

WFMZTV

WPPX

WEDY

WTICTV

WACI

Spectrum encumbered by:

One station:

Two stations:

Three or more:

Evan Kwerel WP_38_Presentation.3.11.04


How to end the spectrum drought l.jpg

How to End the Spectrum Drought

Property rights and markets

Define flexible, exclusive and exhaustive spectrum rights

Use markets to move spectrum to its highest value use

FCC spectrum exchange during transition

Simultaneous market mechanism to restructure fragmented spectrum

Wholly voluntary for incumbents

Incentives for incumbents to participate

Reduces transaction costs

Increases liquidity

Evan Kwerel WP_38_Presentation.3.11.04


Proposal for rapid transition l.jpg

Proposal for Rapid Transition

  • Flexibility: reallocate restricted spectrum to flexible, exclusive use

  • FCC spectrum exchange: conduct series of large-scale, two-sided simultaneous auctions of spectrum voluntarily offered by incumbents together with any unassigned spectrum

Evan Kwerel WP_38_Presentation.3.11.04


Proposal continued l.jpg

Proposal (continued)

  • Incentives to participate

    • Immediately grant participants flexibility

    • Allow participants to keep the proceeds from the sale of their spectrum

    • Participating incumbents share in increased value from flexibility and value created by a rapid and efficient restructuring of the spectrum

Evan Kwerel WP_38_Presentation.3.11.04


Proposal continued12 l.jpg

Proposal (continued)

  • Incumbents not harmed

    • Non-participants: allowed to continue current operations and would receive full flexibility in 5 years.

    • Participants: not required to sell to get immediate flexibility. Can buy back their licenses.

  • Expect incumbents to participate

    • Participation costs are low, nothing else to lose

    • No flexibility withheld

    • Participation serves efficiency by making explicit the opportunity cost of keeping spectrum.

Evan Kwerel WP_38_Presentation.3.11.04


Initial implementation l.jpg

Initial Implementation

  • 413 MHz in the 300 to 3000 MHz range

  • Reduce current spectrum shortages for high demand uses

Evan Kwerel WP_38_Presentation.3.11.04


Removing barriers to flexible use isn t enough l.jpg

Removing Barriers to Flexible Use Isn’t Enough

  • Unassigned spectrum needs to be available for flexible use

  • Need to reconfigure existing spectrum into tradable property rights

    • Redefine interference limits in terms of outputs

    • Some licenses dissolve into flexible overlay licenses

Evan Kwerel WP_38_Presentation.3.11.04


Removing barriers to flexible use isn t enough cont d l.jpg

Removing Barriers to Flexible Use Isn’t Enough (cont’d)

  • Need to address coordination problem

    • Put all highly interdependent spectrum up for sale at the same time

    • Mechanism to combine spectrum into efficient packages

  • Incentive problems may prevent efficiency-enhancing trades

    • Interests of spectrum managers vs. interests of firm as a whole

    • Incumbents with incentives to strategically hold out

Evan Kwerel WP_38_Presentation.3.11.04


Who runs the exchange l.jpg

Who Runs the Exchange?

  • Why not a purely private spectrum exchange?

    • Who sells FCC held spectrum?

  • The FCC is in the best position to solve the coordination problem

    • FCC holds unencumbered spectrum

    • Little cost to adding licensed spectrum

    • FCC has established credibility in conducting transparent auctions for spectrum rights

Evan Kwerel WP_38_Presentation.3.11.04


Who runs the exchange17 l.jpg

Who Runs the Exchange?

  • The FCC is in the best position to solve incentive problems of ensuring participation and mitigating hold-out problems

    • FCC regulatory authority over spectrum gives it more carrots (e.g., conditional flexibility) and sticks than private parties

    • Solving the coordination problem helps solve the participation problem

Evan Kwerel WP_38_Presentation.3.11.04


Remaining issues l.jpg

Remaining Issues

  • Design of exchange mechanism

    • Incumbents can bid on (and buy back) own licenses in in band-restructuring auction

    • Exchange with rising bids and falling ask prices

    • Role of FCC as seller of spectrum

  • Defining flexible spectrum rights to promote liquidity in the spectrum exchange

Evan Kwerel WP_38_Presentation.3.11.04


Remaining issues19 l.jpg

Remaining Issues

  • “Special” categories of exclusively licensed bands

    • Public safety spectrum

    • Public broadcasting spectrum

    • Federal government spectrum

  • Spectrum not exclusively licensed to private parties

    • Non-exclusive (e.g., private land mobile)

    • Unlicensed spectrum (part 15)

Evan Kwerel WP_38_Presentation.3.11.04


Current focus mds itfs band restructuring l.jpg

Current Focus:MDS/ITFS Band Restructuring

  • 200 megahertz of spectrum below 3 GHz

    • 2500-2690 MHz and 2150-2162 MHz

    • More total spectrum than cellular and PCS

    • International 3G band

  • Mostly in low value uses, e.g., one-way video services

  • Spectrum highly fragmented

    • In geography - Small geographic and site licenses (geography splintered)

    • In frequency - Interleaved licensing

  • Most ITFS spectrum leased to MDS

  • Secondary markets active, but limited by transactions cost

Evan Kwerel WP_38_Presentation.3.11.04


Slide21 l.jpg

Alternative Band Plans

E4

G4

C1

C2

C3

C4

E1

E2

E3

G1

G2

G3

A1

A2

A3

A4

resp.

F4

H3

F2

F3

H1

H2

D4

D3

F1

D1

D2

B4

B1

B2

B3

Current Channel Plan

A

B

C

D

A

B

C

D

E

F

G

E

F

H

G

J band

K band

Coalition Band Plan

16.5 megahertz blocks

16.5 megahertz blocks

Evan Kwerel WP_38_Presentation.3.11.04


Mds itfs exchange proposal l.jpg

MDS/ITFS Exchange Proposal

  • Give incumbents new spectrum rights as defined in coalition proposal

  • Hold a simultaneous spectrum exchange for “white space” and the new rights held by incumbents

  • Nobody moves until after the exchange closes

Evan Kwerel WP_38_Presentation.3.11.04


Mds itfs issues with exchange proposal l.jpg

MDS/ITFS Issues with Exchange Proposal

  • Incentive to participate

  • Lease arrangements – who is authorized to sell rights?

  • Market liquidity and holdouts

  • License areas –crazy quilt pattern based on service areas of ITFS site licenses

  • Auction design

Evan Kwerel WP_38_Presentation.3.11.04


Mds itfs band clearing vouchers l.jpg

MDS/ITFSBand Clearing Vouchers

  • Incumbents turn in their spectrum licenses in exchange for vouchers

  • Incumbents could opt out of voucher plan and receive a 6 MHz high power channel that closely matches their current service area. ITFS opt outs get moving costs from auction winners.

  • FCC creates new, unencumbered geographic area licenses suited to new uses

Evan Kwerel WP_38_Presentation.3.11.04


Mds itfs voucher valuation l.jpg

MDS/ITFSVoucher Valuation

  • Vouchers equal to auction value of spectrum “attributed” to incumbents under new band plan

    • Each incumbent attributed spectrum quantities (MHz-Pops) based on Coalition plan or a modified plan

    • Voucher value equal to MHz-Pops attributed to incumbent multiplied by the auction prices per MHz-pop in incumbent’s service areas

Evan Kwerel WP_38_Presentation.3.11.04


Mds itfs vouchers equivalent to cash l.jpg

MDS/ITFSVouchers Equivalent to Cash

  • Vouchers could be used to pay winning bid in MDS/ITFS or any subsequent auction

  • Vouchers are transferable and divisible

  • Vouchers allow incumbents that no longer want to maintain spectrum holdings to fund educational and communications needs (consistent with Commission’s original intent in allowing ITFS leasing)

Evan Kwerel WP_38_Presentation.3.11.04


Mds itfs voucher proposal auction design l.jpg

MDS/ITFSVoucher Proposal Auction Design

  • FCC holds simultaneous auction w/ package bidding for all MDS/ITFS spectrum

  • Bidders would bid on spectrum with certain characteristics (location, bandwidth, low power or high power), not specific frequencies, minimizing opportunity for destructive strategic behavior in auction

Evan Kwerel WP_38_Presentation.3.11.04


Benefits of voucher proposal compared to exchange proposal l.jpg

Benefits of Voucher Proposal Compared to Exchange Proposal

  • Clears all spectrum designated for low power use

    • Puts all the spectrum in low power segments of band in market at the same time

    • Allows FCC to choose efficient new license areas better suited to low power cellular-like uses

  • Eliminates leases and associated bargaining issues

  • Eliminates strategic hold-out problems

  • Increases market liquidity w/ fungible spectrum

  • Can use one-sided auction mechanism

Evan Kwerel WP_38_Presentation.3.11.04


Costs of voucher proposal compared to exchange proposal l.jpg

Costs of Voucher Proposal Compared to Exchange Proposal

  • Not voluntary

  • Incumbents may not be able to precisely replicate current service areas

  • Requires FCC to determine metric for spectrum rights

Evan Kwerel WP_38_Presentation.3.11.04


Thank you for more information l.jpg

Thank YouFor More Information

  • OSP Working Paper No. 38 www.fcc.gov/osp/workingp.html

  • [email protected]

Evan Kwerel WP_38_Presentation.3.11.04


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