Telecommunications
Strong Support for Extending FCC's Auction Authority Exists, but Little Agreement on Other Options to Improve Efficient Use of Spectrum Gao ID: GAO-06-236 December 20, 2005The radio-frequency spectrum is a natural resource used to provide an array of wireless communications services, such as television broadcasting, which are critical to the U.S. economy and national security. In 1993, the Congress gave the Federal Communications Commission (FCC) authority to use competitive bidding, or auctions, to assign spectrum licenses to commercial users. The Commercial Spectrum Enhancement Act required GAO to examine FCC's commercial spectrum licensing process. Specifically, GAO examined the (1) characteristics of the current spectrum allocation process for commercial uses; (2) impact of the assignment process--specifically the adoption of auctions to assign spectrum licenses--on end-user prices, infrastructure deployment, competition, and entry and participation of small businesses; and (3) options for improving spectrum management.
The current spectrum allocation process is largely characterized as a "command-and-control" process, in which the government largely dictates how the spectrum is used. Many stakeholders we spoke with, along with panelists on our expert panel, identified a number of weaknesses of the existing spectrum allocation process, including that the current process is slow and leads to underutilization of the spectrum. FCC staff have identified two alternative allocation models: the "exclusive, flexible rights" model--which would extend the existing process by providing greater flexibility to spectrum license holders--and the "open-access" (or "commons") model--which would allow an unlimited number of unlicensed users to share spectrum. While little consensus exists about fully adopting either alternative model, FCC staff, as well as many stakeholders and panelists on our expert panel, recommend a balanced approach that would combine elements of the current process and the two alternative models. FCC's use of auctions to assign spectrum appears to have little to no negative impact on end-user prices, infrastructure deployment, and competition; evidence on how auctions impact the entry and participation of small businesses is less clear. Additionally, FCC's implementation of auctions has mitigated problems associated with comparative hearings and lotteries, which FCC previously used to assign licenses. In particular, auctions are quicker, less costly, and more transparent. Finally, secondary markets provide an additional mechanism for companies to acquire licenses and gain access to spectrum, and FCC has undertaken actions to facilitate secondary-market transactions, such as streamlining the approval process for leases. Industry stakeholders and panelists on our expert panel offered a number of options for improving spectrum management. The most frequently cited options include (1) extending FCC's auction authority, (2) reexamining the use and distribution of spectrum--such as between commercial and governmental use--to enhance the efficient and effective use of this important resource, and (3) ensuring flexibility in commercially licensed spectrum bands. Stakeholders and panelists on our expert panel overwhelmingly supported extending FCC's auction authority; however, there was little consensus on the other identified options for improvement.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-06-236, Telecommunications: Strong Support for Extending FCC's Auction Authority Exists, but Little Agreement on Other Options to Improve Efficient Use of Spectrum
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Improve Efficient Use of Spectrum' which was released on December 21,
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Report to Congressional Committees:
December 2005:
Telecommunications:
Strong Support for Extending FCC's Auction Authority Exists, but Little
Agreement on Other Options to Improve Efficient Use of Spectrum:
GAO-06-236:
GAO Highlights:
Highlights of GAO-06-236, a report to congressional committees:
Why GAO Did This Study:
The radio-frequency spectrum is a natural resource used to provide an
array of wireless communications services, such as television
broadcasting, which are critical to the U.S. economy and national
security. In 1993, the Congress gave the Federal Communications
Commission (FCC) authority to use competitive bidding, or auctions, to
assign spectrum licenses to commercial users.
The Commercial Spectrum Enhancement Act required GAO to examine FCC‘s
commercial spectrum licensing process. Specifically, GAO examined the
(1) characteristics of the current spectrum allocation process for
commercial uses; (2) impact of the assignment process”specifically the
adoption of auctions to assign spectrum licenses”on end-user prices,
infrastructure deployment, competition, and entry and participation of
small businesses; and (3) options for improving spectrum management.
What GAO Found:
The current spectrum allocation process is largely characterized as a
’command-and-control“ process, in which the government largely dictates
how the spectrum is used. Many stakeholders we spoke with, along with
panelists on our expert panel, identified a number of weaknesses of the
existing spectrum allocation process, including that the current
process is slow and leads to underutilization of the spectrum. FCC
staff have identified two alternative allocation models: the
’exclusive, flexible rights“ model”which would extend the existing
process by providing greater flexibility to spectrum license
holders”and the ’open-access“ (or ’commons“) model”which would allow an
unlimited number of unlicensed users to share spectrum. While little
consensus exists about fully adopting either alternative model, FCC
staff, as well as many stakeholders and panelists on our expert panel,
recommend a balanced approach that would combine elements of the
current process and the two alternative models.
FCC‘s use of auctions to assign spectrum appears to have little to no
negative impact on end-user prices, infrastructure deployment, and
competition; evidence on how auctions impact the entry and
participation of small businesses is less clear. Additionally, FCC‘s
implementation of auctions has mitigated problems associated with
comparative hearings and lotteries, which FCC previously used to assign
licenses. In particular, auctions are quicker, less costly, and more
transparent. Finally, secondary markets provide an additional mechanism
for companies to acquire licenses and gain access to spectrum, and FCC
has undertaken actions to facilitate secondary-market transactions,
such as streamlining the approval process for leases.
Industry stakeholders and panelists on our expert panel offered a
number of options for improving spectrum management. The most
frequently cited options include (1) extending FCC‘s auction authority,
(2) reexamining the use and distribution of spectrum”such as between
commercial and governmental use”to enhance the efficient and effective
use of this important resource, and (3) ensuring flexibility in
commercially licensed spectrum bands. Stakeholders and panelists on our
expert panel overwhelmingly supported extending FCC‘s auction
authority; however, there was little consensus on the other identified
options for improvement.
Images Depicting Common Uses of Spectrum:
[See PDF for image]
[End of figure]
What GAO Recommends:
In 2003, GAO recommended that an independent commission examine
spectrum management. In this report, GAO recommends that the Congress
consider extending FCC‘s auction authority beyond the current
expiration date of September 30, 2007. FCC provided technical comments
on this report and OMB generally agreed with the report.
www.gao.gov/cgi-bin/getrpt?GAO-06-236.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact JayEtta Z. Hecker at
(202) 512-2834 or heckerj@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Spectrum Allocation Remains Largely a Command-and-Control Process, But
Alternatives Exist:
Auctions Have Little to No Negative Impact on the Wireless Industry and
Are More Efficient than Previous Assignment Mechanisms:
Industry Stakeholders and Panelists Suggested Several Options to
Improve Spectrum Management:
Conclusions:
Matter for Congressional Consideration:
Agency Comments:
Appendix:
Appendix I: Scope and Methodology:
Tables:
Table 1: List of non-government interviewees:
Table 2: Panelists on GAO/National Academies expert panel:
Figures:
Figure 1: Distribution of Spectrum Between Federal and Nonfederal
Users:
Figure 2: Percent of Licenses Auctioned:
Figure 3: Panelists' Views on the Allocation of Spectrum between
Commercial and Government Use:
Figure 4: Panelists' Views on the Allocation of Spectrum between
Licensed and Unlicensed Use:
Abbreviations:
CMRS: Commercial Mobile Radio Service:
CSIS: Center for Strategic and International Studies:
CTIA: Cellular Telecommunications and Internet Association:
DARS: Digital Audio Radio Service:
FCC: Federal Communications Commission:
GAO: Government Accountability Office:
GHz: Gigahertz:
ITU: International Telecommunication Union:
MHz: Megahertz:
NTIA: National Telecommunications and Information Administration:
OMB: Office of Management and Budget:
PCS: Personal Communications Services:
SMR: Specialized Mobile Radio:
Letter December 20, 2005:
The Honorable Ted Stevens:
Chairman:
The Honorable Daniel K. Inouye:
Co-Chairman:
Committee on Commerce, Science, and Transportation:
United States Senate:
The Honorable Joe Barton:
Chairman:
The Honorable John D. Dingell:
Ranking Minority Member:
Committee on Energy and Commerce:
House of Representatives:
The radio-frequency spectrum is a natural resource used to provide an
array of wireless communications services that are critical to the U.S.
economy and national security, such as mobile voice and data services,
radio and television broadcasting, radar, and satellite-based services.
Historically, concern about interference among users has been a driving
force in the management of spectrum. The Federal Communications
Commission (FCC)--an independent agency that regulates spectrum use for
nonfederal users, including commercial users--and the National
Telecommunications and Information Administration (NTIA)--an agency
within the Department of Commerce that regulates spectrum for federal
government users--have worked to minimize interference through the
"allocation" and "assignment" of spectrum. Allocation involves
designating "bands" of spectrum for specific types of services or
classes of users, such as designating certain bands for commercial or
government use. Assignment provides an authorization or license to use
a specific portion of spectrum to entities, such as wireless companies;
this is referred to as "licensed spectrum." In contrast, some bands of
spectrum are allocated to "unlicensed" use, where an unlimited number
of users without licenses share the band of spectrum.[Footnote 1]
Demand for radio-frequency spectrum has exploded over the past several
decades as new technologies and services have been--and continue to be-
-brought to the market in the private sector and new mission needs
unfold among government users of spectrum, including wireless
communications critical for public safety officials responding to
natural and man-made disasters. As a result, nearly all parties are
becoming increasingly concerned about the availability of spectrum for
future needs, because most of the usable spectrum in the United States
has already been allocated to existing services and users. These
concerns are compounded by evidence that some of the spectrum is
currently underutilized. Therefore, to promote a more efficient use of
this resource and meet future needs, FCC has increasingly adopted more
market-oriented approaches to spectrum management in recent years,
including using a competitive bidding process, or auctions, to assign
spectrum licenses to commercial users. Prior to auctions, FCC used
comparative hearings, which were quasi-judicial forums, and lotteries
as assignment mechanisms. As of November 30, 2005, FCC has held 59
auctions for over 56,000 licenses to select between competing
applications for the same license, and generated over $14.5 billion for
the U.S. Treasury.[Footnote 2]
The Commercial Spectrum Enhancement Act required GAO to examine FCC's
commercial spectrum licensing process.[Footnote 3] As discussed with
the committees of jurisdiction, we examined the (1) characteristics of
the current spectrum allocation process for commercial uses; (2) impact
of the assignment process--specifically the adoption of auctions to
assign spectrum licenses--on end-user prices, infrastructure
deployment, competition, and entry and participation of small
businesses; and (3) options for improving spectrum management. To
address these issues, we reviewed and synthesized relevant economic,
legal, and policy-oriented literature, such as the Spectrum Policy Task
Force report, a document produced by FCC staff. In addition, we hosted,
in conjunction with the National Academies, two balanced and diverse
expert panels with 23 experts representing academia, government, and
industry. The experts discussed policy issues related to spectrum
allocation and assignment, as well as options for improving spectrum
management in the future. We also conducted semi-structured interviews
with representatives of academia, government, and industry. Finally, we
interviewed officials at FCC and analyzed data from FCC's three primary
spectrum license databases: the Universal Licensing System, the
Consolidated Database System, and the International Bureau Filing
System. We conducted our work from March through August 2005 in
accordance with generally accepted government auditing standards. (See
app. I for additional information on our scope and methodology.)
Results in Brief:
FCC's current spectrum allocation process is largely characterized as a
"command-and-control" process--that is, the government largely dictates
how spectrum is used. In particular, FCC, based on regulatory
judgments, determines and limits what types of services--such as
broadcast, satellite, or mobile radio--will be offered in different
frequency bands by geographic area. In addition, FCC issues service
rules to define the terms and conditions for spectrum use within given
bands. These rules typically specify eligibility standards as well as
limitations on the services that may be offered in different frequency
bands and the equipment and power levels that may be used. Many
stakeholders we spoke to and panelists on our expert panel identified a
number of weaknesses with the command-and-control process. For example,
panelists and stakeholders noted that the current process is slow and
leads to underutilization of the spectrum, among other things. In its
2002 Spectrum Policy Task Force Report, FCC staff identified two
alternative spectrum management models to the command-and-control
model: the "exclusive, flexible rights" model and the "open-access" (or
"commons") model.[Footnote 4] The exclusive, flexible rights model
provides licensees with exclusive, flexible use of spectrum, and
transferable rights within defined geographic areas; in contrast, the
open-access model allows an unlimited number of unlicensed users to
share frequencies. Both models are more market-oriented than the
command-and-control model--that is, supply and demand for spectrum-
based services play a greater role in determining how spectrum is used,
or allocated. FCC is currently using elements of each model. For
example, in recent years, FCC has provided significant operational and
technical flexibility for many commercial radio services, such as
Personal Communications Services (PCS). However, there is limited
consensus about fully adopting either alternative model in the future.
Many stakeholders and members of our expert panel, as well as the
Spectrum Policy Task Force, support approaches that would combine
elements of all three models. But, the relative mix of these approaches
remains an area of little agreement.
Available evidence indicates that FCC's use of auctions as an
assignment mechanism for licensed spectrum has had little to no
negative impact on end-user prices, infrastructure deployment, and
competition; evidence on how auctions impact the entry and
participation of small businesses is less clear. According to economic
research and many of the industry stakeholders we spoke to, auctions
have little to no effect on end-user prices because the auction
payments represent a sunk cost,[Footnote 5] which does not affect
future-oriented decisions, such as pricing decisions. Similar arguments
were made for the impact of auctions on infrastructure deployment. In
addition, some industry stakeholders told us that companies' drive for
a return-on-investment (i.e., they need to earn a return on the auction
payment) and competition induces companies to invest and innovate.
Thus, rather than diverting resources from investment and innovation,
auctions encourage these actions. Many industry stakeholders also told
us that auctions generally do not place companies at a competitive or
financial disadvantage compared to companies that acquired licenses
through means other than auctions. The evidence is less certain
regarding the effect of auctions on entry and participation of small
businesses. For instance, many industry stakeholders we interviewed
stated that auctions limit participation to large companies with
extensive financial resources. However, others noted that large
companies tended to also dominate the comparative hearing process and
that auctions at least make the process transparent; some stakeholders
also commented that the capital-intensive nature of the wireless
communications industry makes it difficult for small businesses to
compete, regardless of the assignment mechanism used. In addition,
FCC's implementation of auctions mitigates a number of problems
associated with comparative hearings and lotteries. For example,
auctions are faster, less costly, and more transparent than these
previous assignment mechanisms. Finally, in addition to auctions,
companies can obtain access to the spectrum resource on the secondary
market, which involves the sale of licenses or the leasing of spectrum
usage rights among private entities. FCC has recently taken steps to
facilitate secondary-market transactions, including streamlining the
license transfer approval process as well as the procedures by which
parties may enter into spectrum leasing arrangements.
Industry stakeholders and panelists on our expert panel suggested a
number of options for improving spectrum management. The most
frequently cited options include (1) extending FCC's auction authority,
(2) reexamining the use and distribution of spectrum, and (3) ensuring
clearly defined rights and flexibility in commercially licensed
spectrum bands. Panelists and stakeholders overwhelmingly supported
extending FCC's auction authority. For example, 21 of 22 panelists
supported extending FCC's auction authority, which is scheduled to
expire in 2007.[Footnote 6] To gain a good understanding of how much
spectrum is currently being used, a few panelists suggested perhaps
adopting a "spectrum census" to systematically track usage. A number of
panelists also suggested that the government evaluate the relative
allocation of spectrum for government and commercial use as well as the
allocation of spectrum for licensed and unlicensed purposes, although
there was little consensus on the relative allocations between these
uses. Some panelists suggested that government better define spectrum
users' rights, which would clarify understanding of the rights awarded
with a license. Others also thought that government should provide
licensees with greater flexibility to determine the type of technology
used and services offered, although this flexibility could lead to
greater interference and thus greater flexibility would need to be
balanced with interference protection. There was no consensus on these
options for improvements among stakeholders and panelists on our expert
panel, except for extending FCC's auction authority.
To achieve greater consensus for reform of the spectrum management
process, we previously suggested that the Congress consider
establishing an independent commission that would conduct a
comprehensive examination of spectrum management.[Footnote 7] To date,
such a commission has not been established. In this report, we
recommend that the Congress consider extending FCC's auction authority
beyond the current expiration date of September 30, 2007. We provided a
draft of this report to FCC, NTIA, and the Office of Management and
Budget. FCC provided technical comments that we incorporated where
appropriate. NTIA had no comments on the draft. The Office of
Management and Budget (OMB) concurred with our finding that auctions
have mitigated problems associated with comparative hearings and
lotteries and noted that the Administration supports the permanent
extension of FCC's auction authority. OMB also noted that the
Administration has proposed to give FCC authority to use economic
mechanisms to promote efficient spectrum use.
Background:
The radio-frequency spectrum is the part of the natural spectrum of
electromagnetic radiation lying between the frequency limits of 9
kilohertz and 300 gigahertz.[Footnote 8] It is the medium that makes
possible wireless communications and supports a vast array of
commercial and governmental services. Commercial entities use spectrum
to provide a variety of wireless services, including mobile voice and
data, paging, broadcast television and radio, and satellite services.
Additionally, some companies use spectrum for private tasks, such as
communicating with remote vehicles. Federal, state, and local agencies
also use spectrum to fulfill a variety of government missions. For
example, state and local police departments, fire departments, and
other emergency services agencies use spectrum to transmit and receive
critical voice and data communications, and federal agencies use
spectrum for varied mission needs such as national defense, law
enforcement, weather services, and aviation communication.
Spectrum is managed at the international and national levels. The
International Telecommunication Union (ITU), a specialized agency of
the United Nations, coordinates spectrum management decisions among
nations. Spectrum management decisions generally require international
coordination, since radio waves can cross national borders. Once
spectrum management decisions are made at the ITU, regulators within
each nation, to varying degrees, will follow the ITU decisions. In the
United States, responsibility for spectrum management is divided
between two agencies: FCC and NTIA. FCC manages spectrum use for
nonfederal users, including commercial, private, and state and local
government users under authority provided in the Communications Act.
NTIA manages spectrum for federal government users and acts for the
President with respect to spectrum management issues.[Footnote 9] FCC
and NTIA, with direction from the Congress, jointly determine the
amount of spectrum allocated to federal and nonfederal users, including
the amount allocated to shared use. Figure 1 shows the current
allocation of spectrum between federal and nonfederal users.
Figure 1: Distribution of Spectrum Between Federal and Nonfederal
Users:
[See PDF for image]
Note: Not all spectrum frequencies are equivalent. For example, at
higher frequencies, more bandwidth is required to provide
communications services. Additionally, licenses can vary considerably
in terms of bandwidth, as well as the geographic area and population
covered.
[End of figure]
Historically, concern about interference or crowding among users has
been a driving force in the management of spectrum.[Footnote 10] FCC
and NTIA work to minimize interference through two primary spectrum
management functions--the "allocation" and the "assignment" of radio
spectrum. Specifically:
* Allocation involves segmenting the radio spectrum into bands of
frequencies that are designated for use by particular types of radio
services or classes of users. For example, the frequency bands between
88 and 108 megahertz (MHz) are allocated to FM radio broadcasting in
the United States. In addition to allocation, spectrum managers also
specify service rules, which include the technical and operating
characteristics of equipment.
* Assignment, which occurs after spectrum has been allocated for
particular types of services or classes of users, involves providing a
license or authorization to use a specific portion of spectrum to
users, such as commercial entities or government agencies. FCC assigns
licenses for frequency bands to commercial enterprises, state and local
governments, and other entities, while NTIA makes frequency assignments
to federal agencies.[Footnote 11]
In some frequency bands, FCC authorizes unlicensed use of spectrum--
that is, users do not need to obtain a license to use the
spectrum.[Footnote 12] Rather, an unlimited number of unlicensed users
can share frequencies on a non-interference basis. Thus, the assignment
process does not apply to the use of unlicensed devices. However,
manufacturers of unlicensed equipment must receive authorization from
FCC before operating or marketing an unlicensed device.
When FCC assigns a portion of spectrum to a single entity, the license
is considered exclusive. When two or more entities apply for the same
exclusive license, FCC classifies these as mutually exclusive
applications--that is, the grant of a license to one entity would
preclude the grant to one or more other entities. For mutually
exclusive applications, FCC has primarily used the following three
assignment mechanisms.
* Comparative hearings were quasi-judicial forums in which competing
applicants argued why they should be awarded a license, and FCC awarded
licenses based on pre-established comparative criteria. FCC principally
used comparative hearings from 1934 to 1984. Critics asserted that
comparative hearings were time consuming and resource intensive, lacked
transparency, and often led to protracted litigation.
* Lotteries entailed FCC randomly selecting licensees from a pool of
qualified applicants. Congress authorized FCC to use lotteries to
assign mutually exclusive licenses in 1981, partially in response to
the administrative burden associated with comparative hearings. FCC
used lotteries from 1984 to 1993.[Footnote 13] Critics contended that
lottery winners were not always the best suited to provide services;
thus, several years could pass before the licenses were transferred in
the secondary market to entities capable of deploying a system and
effectively using the spectrum.
* Auctions are a market-based mechanism in which FCC assigns a license
to the entity that submits the highest bid for specific bands of
spectrum. The Congress provided FCC with authority to use auctions to
assign mutually exclusive licenses for certain subscriber-based
wireless:
services in the Omnibus Budget Reconciliation Act of 1993.[Footnote 14]
In subsequent years, the Congress has modified and extended FCC's
auction authority, including exempting some licenses from competitive
bidding, such as licenses for public safety radio services and
noncommercial educational broadcast services. Critics of auctions have
suggested that auctions raise consumer prices for wireless services,
slow the deployment of wireless systems, and are a barrier for small
businesses.
As of November 30, 2005, FCC has conducted 59 auctions to select
between competing applications for the same license, which have
generated over $14.5 billion for the U.S. Treasury. However, only a
very small portion of total licenses has been auctioned. In particular,
FCC has auctioned approximately 56,100 licenses--about 2 percent of
total licenses. (See fig. 2.) The other 98 percent of licenses have
been assigned through other means.[Footnote 15]
Figure 2: Percent of Licenses Auctioned:
[See PDF for image]
Notes:
To calculate the percentage of licenses that have been auctioned, we
divided the number of auctioned licenses by the number of licenses
included in FCC's three spectrum license databases.
Not all spectrum frequencies are equivalent. For example, at higher
frequencies, more bandwidth is required to provide communications
services.
[End of figure]
In recent years, two government-led task forces have examined spectrum
policy in the U.S. FCC established the Spectrum Policy Task Force,
comprised of FCC staff, to assist the Commission in identifying and
evaluating changes in spectrum policy that would increase the public
benefits derived from the use of spectrum. In November 2002, the task
force released a report that contained a number of recommendations,
including promoting more market-based mechanisms to allocate
spectrum.[Footnote 16] The Commission subsequently implemented several
of the task force's recommendations, including developing rules for
leasing spectrum. The Federal Government Spectrum Task Force,[Footnote
17] comprised of the heads of executive branch departments, agencies,
and offices, examined spectrum policy for government use, including
homeland security, public safety, scientific research, federal
transportation infrastructure, and law enforcement. In June 2004, the
Department of Commerce released two reports based on the task force's
findings, which contained a number of recommendations for reforms to
federal agencies' use of spectrum. For example, the Department of
Commerce recommended adopting incentives for more efficient use of
spectrum by government agencies. However, as we noted in 2003, the
bifurcated responsibility between FCC and NTIA for spectrum management
can hinder reform.[Footnote 18] Specifically, neither FCC nor NTIA has
ultimate decision making authority over spectrum management or the
authority to impose fundamental reform. Because of the lack of a single
decision making point for spectrum reform, we recommended that the
Congress consider establishing an independent commission that would
conduct a comprehensive examination of spectrum management. To date,
such a commission has not been established.
Spectrum Allocation Remains Largely a Command-and-Control Process, But
Alternatives Exist:
Spectrum allocation remains largely a command-and-control process,
although FCC is providing greater flexibility in some instances,
particularly as it licenses newly available spectrum. Many stakeholders
with whom we spoke and panelists on our expert panel identified a
number of weaknesses with the command-and-control process. FCC staff
identified two alternative spectrum management models: the exclusive,
flexible rights model and the open-access, or commons, model. Under
these models, users of spectrum, rather than FCC, would exert a greater
influence on the use of spectrum. Although there is limited consensus
about fully adopting either alternative model in the future, many
stakeholders and members of our expert panel, as well as the Spectrum
Policy Task Force, support balanced approaches that would combine
elements of all three models.
Spectrum Allocation Is Largely a Command-and-Control Process:
FCC currently employs largely a command-and-control process for
spectrum allocation.[Footnote 19] That is, FCC applies regulatory
judgments to determine and limit what types of services--such as
broadcast, satellite, or mobile radio--will be offered in different
frequency bands by geographic area. In addition, for most frequency
bands FCC allocates, the agency issues service rules to define the
terms and conditions for spectrum use within the given bands. These
rules typically specify eligibility standards as well as limitations on
the services that relevant entities may offer and the technologies and
power levels they may use. These decisions can constrain users' ability
to offer services and equipment of their choosing.
FCC has provided greater operational and technical flexibility within
certain frequency bands. For example, FCC's rules for Commercial Mobile
Radio Service (CMRS), which include cellular and PCS services, are
considered less restrictive. Under these rules, wireless telephony
operators are free to select technologies, services, and business
models of their choosing. In contrast, spectrum users have relatively
little latitude for making such choices in frequency bands allocated
for broadcast television services.
Despite these efforts, many industry stakeholders and experts with whom
we spoke cited a number of weaknesses in the command-and-control
process for spectrum allocation. The most frequently cited weakness by
our expert panel was the slowness of the allocation process. Because of
the regulatory nature of the command-and-control process, arriving at
allocation decisions can be a protracted process. The slow moving
allocation process delays consumers' access to new technologies. In
addition, some panelists noted that the current allocation process
leads to underutilization of spectrum. For example, a recent study
found that during a four-day period in New York City, only 13 percent
of spectrum between 30 MHz and 2.9 GHz was occupied at one time or
another.[Footnote 20] Another weakness cited by a number of
stakeholders was that the command-and-control process does not
systematically allocate spectrum to its highest value uses. As a
result, highly valued services may not be fully deployed.
FCC's Spectrum Policy Task Force Identified Two Alternatives to the
Command-and-Control Allocation Process but Recommends a Balanced
Approach:
The Spectrum Policy Task Force Report, a document produced by FCC
staff, identified two alternative spectrum management models to the
command-and-control model: the exclusive, flexible rights model, and
the open-access model. The exclusive, flexible rights model extends the
existing license-based allocation process by providing greater
flexibility to license holders. The open-access model allows an
unlimited number of unlicensed users to share frequencies, with usage
rights governed by technical standards. Both models allow flexible use
of spectrum, so that users of spectrum, rather than FCC, play a larger
role in determining how spectrum is ultimately used. FCC's Spectrum
Policy Task Force recommended a balanced approach to allocation--
utilizing aspects of the command-and-control; exclusive, flexible
rights; and open-access models.
The Exclusive, Flexible Rights Model Is a License-Based Approach to
Spectrum Allocation:
The exclusive, flexible rights model provides licensees with exclusive,
flexible use of the spectrum and transferable rights within defined
geographic areas. This is a licensed-based approach to spectrum
management that extends the existing allocation process by providing
greater flexibility regarding the use of spectrum and the ability to
transfer licenses or to lease spectrum usage rights. Licensees with
exclusive licenses can exclude others from using the spectrum they have
been assigned, and with flexible rights they enjoy flexibility to
provide the services they wish with their licenses, provided they
comply with applicable FCC rules and policies. To a certain extent, the
model treats spectrum like real estate, and some have suggested moving
far in this direction by turning spectrum licenses into full property
rights--an option that existing legislation currently
prohibits.[Footnote 21] FCC's broadband PCS rules closely resemble this
model, in that they provide substantial flexibility to licensees in
terms of technology and use of spectrum.
Proponents cite several advantages with the exclusive, flexible rights
model. First, proponents argue that this model would promote the
economically efficient use of spectrum. For example, advocates
typically point to CMRS to support this argument, as CMRS licenses are
exclusive and governed by relatively flexible rules; in addition, the
market for CMRS services is highly valuable, innovative, and fast-
growing. Second, proponents suggest that the model provides certainty
for licensees. The model provides a reliable means of protecting
commercial users from interference, allowing them to guarantee quality
of service on a wide scale. Third, proponents argue that greater
certainty will encourage investment in technology and infrastructure.
Opponents cite several problems with the exclusive, flexible rights
model. For example, opponents assert that the model might not promote
technically efficient, or intensive, use of spectrum. According to some
critics, exclusivity might reduce licensees' incentives to invest in
developing more technically efficient technologies as users have
guaranteed access to spectrum, thereby deterring innovation. In
addition, some opponents assert that the model could encourage
"hoarding" of spectrum, as licensees could benefit from blocking access
to spectrum by potential competitors. In other words, companies may buy
rights to spectrum--with no intention of using the spectrum--to prevent
a competitor from acquiring rights to the same spectrum.
The Open-Access Model Is a Non-Licensed Approach to Spectrum
Allocation:
The open-access model allows a potentially unlimited number of
unlicensed users to share frequency bands, with usage rights governed
by technical standards, but with no rights to interference protection.
This approach does not require licenses, and as such is similar to the
current FCC Part 15 rules (which govern unlicensed use in the 900 MHz,
2.4 GHz, and 5.8 GHz bands)--where cordless phones and Wi-Fi
technologies operate. As with exclusive, flexible rights, users would
have greater latitude in determining how they use spectrum. However, in
this case, markets for end-user equipment, rather than for licenses,
would determine how different frequency bands are used or allocated.
Under this model, commercial spectrum-based service providers would not
seek to maximize their return on spectrum licenses, but rather, on the
sale of equipment that, once purchased, would allow consumers to enjoy
wireless services.
Proponents of the open-access model cite several advantages with this
approach to spectrum allocation. For example, proponents assert that
the open-access model will promote the technically efficient use of
spectrum. In order to avoid interference, users have an incentive to
develop smarter equipment that will use the spectrum intelligently. An
example of technically efficient equipment is agile radio. Agile radios
can determine if a specific frequency is currently in use, emit in that
band if it is not, and switch to another band in microseconds if
another user begins to emit in:
that band.[Footnote 22] In fact, supporters of the open-access model
believe that open access to spectrum will foster the development of
technologies that will reduce spectrum scarcity, and therefore
interference problems, as a new type of wireless architecture becomes
possible. According to proponents, the open-access model for spectrum
allocation also limits the ability for companies to "hoard" spectrum--
that is, since there would be no exclusive use of spectrum in this
model, companies could no longer block their competitors from acquiring
spectrum by simply acquiring or holding on to spectrum themselves. In
addition, since users would no longer need to buy spectrum rights, the
open-access model reduces barriers to entry into spectrum-based
markets, according to proponents.
Opponents cite several problems with the open-access model. One cited
problem is that an open-access approach could lead to the overuse of
spectrum. Specifically, opponents believe that the technologies that
could end spectrum scarcity are years away from realization. Without
such technologies, an unlimited number of unlicensed users would result
in the overuse of spectrum and interference. Moreover, opponents argue
that the uncertainty about interference would inhibit investment.
Another cited problem is the potential irreversibility of this model--
that is, once consumers have the equipment, it would be difficult to
prevent them from accessing the spectrum if the spectrum were needed
for some other purpose in the future. One only need to imagine the
difficulties involved with trying to prevent people from using their
garage door openers--which operate in some bands under Part 15 rules--
to understand this potential challenge.
FCC's Spectrum Policy Task Force Advocated a Balanced Approach:
The Spectrum Policy Task Force report recommended a balanced approach
to spectrum allocation--utilizing aspects of the command-and-control;
exclusive, flexible rights; and open-access models. In particular,
FCC's task force recommended the following:
* moving away from the command-and-control model, except for limited
exceptions such as public safety or to conform to treaty requirements;
* using the exclusive, flexible rights model where scarcity of spectrum
is a concern and transaction costs are low; and:
* using the open-access model where scarcity is a lesser concern and
transaction costs are relatively high.
Little Consensus Exists about the Future Management of Spectrum:
We found little consensus on the future management of spectrum. As
noted above, there is disagreement about the merits of the exclusive,
flexible rights and open-access models. However, many industry
stakeholders we spoke with and panelists on our expert panel support a
mixed approach, which incorporates spectrum use under an exclusive,
flexible rights licensed model and an open-access model. For example,
those who favor open access do not all believe that licensing should
suddenly be done away with, but that different approaches ought to be
tested and compared before any policy decision is made. Similarly, a
number of industry stakeholders we spoke with who favor providing
spectrum users with flexible rights in licensed bands also believe that
unlicensed spectrum is, at the minimum, appropriate for use by certain
devices within certain bands.
Auctions Have Little to No Negative Impact on the Wireless Industry and
Are More Efficient than Previous Assignment Mechanisms:
Auctions have little to no negative effect on end-user prices,
infrastructure deployment, or competition, although the effect on entry
and participation of small businesses is less certain. FCC's
implementation of auctions has also mitigated problems arising with
comparative hearings and lotteries. In addition to auctions, secondary
markets provide another means for entities to acquire licenses or lease
spectrum in order to gain access to spectrum.
Auctions Have No Negative Impact on the Wireless Industry:
Some critics of spectrum auctions have suggested that auctions
negatively impact the wireless industry. Since auctions require
licensees to pay for licenses, and in some instances the payments can
represent a significant outlay, these critics believe that auctions (1)
raise consumer prices as entities seek to recoup their auction
payments, (2) slow infrastructure deployment by diverting financial
resources to the government, (3) distort competition by creating an
environment where some entities that acquired licenses via auction
compete with other entities that previously acquired licenses via other
means, and (4) deter entry and hinder small business participation in
the wireless industry by necessitating large payments prior to the
issuance of licenses.
We found that FCC's implementation of auctions has no negative impact
on end-user prices, infrastructure deployment, and competition; the
evidence on the impact on entry and participation of small businesses
is less clear. In particular:
* End-user prices. We found that auctions have little to no impact on
end-user prices. Economic research suggests that auction payments do
not affect end-user prices, since these payments represent a sunk cost,
which do not affect future-oriented decisions. For example, using data
on cellular prices from 1985 to 1998, one author empirically found that
auctions had no effect on prices.[Footnote 23] Additionally, industry
stakeholders we spoke to and panelists on our expert panel noted that
competition ultimately affects end-user prices. Thus, regardless of a
company's desire to recoup its auction payment, the company will select
prices that maximize future profits based on competition in the market.
Among the panelists on our expert panel, a majority said that auctions
do not affect end-user prices. Specifically, 10 panelists said that
auctions do not affect end-user prices, 3 said that auctions decrease
prices, and 5 said that auctions increase prices.[Footnote 24]
* Infrastructure Deployment. We found that auctions have little to no
impact on infrastructure deployment. Similar to the argument for end-
user prices, economic research suggests that auction payments do not
deter infrastructure deployment; companies will make decisions about
infrastructure deployment based on the future profit potential of those
investments. Some industry stakeholders with whom we spoke, and
panelists on our expert panel, mentioned that auction payments may in
fact stimulate infrastructure deployment. In particular, since an
auction payment represents an investment, the company will seek a
return on that investment. To earn that return, a wireless company will
sell subscriber services, which are made possible through the
deployment of wireless networks. Among panelists on our expert panel,
eight said that auctions increase investment, five said that auctions
had no effect on investment, and seven said that auctions decrease
investment.
* Competition. We found little evidence that auctions affect the
competitive environment. Many stakeholders told us that auctions
generally do not place companies at a competitive or financial
disadvantage compared to companies that acquired licenses through
other, non-auctioned, means that might not have involved payment for
the licenses, such as lotteries. These stakeholders noted that (1)
companies acquired non-auctioned licenses many years ago, (2) many non-
auctioned licenses have subsequently been sold and paid for, and (3)
companies that acquired non-auctioned licenses have subsequently
acquired additional licenses via auction. Therefore, any competitive
advantage these companies gained by obtaining licenses through means
other than auctions has dissipated. Among our panelists, 11 said that
auctions increase the degree of competition, while 3 said that auctions
had no effect on competition, and 4 said that auctions decrease
competition.
* Entry and participation of small businesses. Some industry
stakeholders we interviewed stated that auctions limit participation to
large companies with extensive financial resources.[Footnote 25] These
stakeholders assert that small companies are unable to acquire the
financial resources necessary to successfully compete in FCC's auction
process. However, others noted that large companies also tended to
dominate the comparative hearing process. In addition, some
stakeholders noted that the capital intensive nature of the wireless
industry--not the assignment mechanism--makes it difficult for small
businesses to participate. Expert opinion diverged on this issue: among
our expert panelists, eight said that auctions increase entry while
another eight said that auctions decrease entry, and three panelists
said that auctions had no effect on entry.
Auctions Mitigate Many Problems Associated with Previous Assignment
Mechanisms:
As mentioned earlier, comparative hearings and lotteries--the two
primary assignment mechanisms employed until 1993--suffered from
several problems. Comparative hearings were generally time consuming
and resource intensive, as entities employed engineers and lawyers to
prepare applications and FCC dedicated staff to evaluating applications
based on pre-established comparative criteria. Further, decisions
arising from comparative hearings lacked transparency and often led to
protracted litigation. While lotteries were less time consuming and
resource intensive, they did not necessarily assign licenses to the
entities that were best suited to provide services. Thus, several years
could pass before the licenses were transferred in the secondary market
to entities capable of deploying a wireless system and effectively
using the spectrum. Further, neither comparative hearings nor lotteries
provided a mechanism for the public to financially benefit from
commercial entities using a valuable national resource.[Footnote 26]
FCC's implementation of auctions mitigates a number of problems
associated with comparative hearings and lotteries. For example:
* Auctions are a relatively quick assignment mechanism. With auctions,
FCC reduced the average time for granting a license to less than one
year from the initial application date, compared to an average time of
over 18 months with comparative hearings.
* Auctions are administratively less costly than comparative hearings.
Entities seeking a license can reduce expenditures for engineers and
lawyers arising from preparing applications, litigating, and lobbying;
and FCC can reduce expenditures associated with reviewing and analyzing
applications.
* Auctions are a transparent process. FCC awards licenses to entities
submitting the highest bid rather than relying on possibly vague
criteria, as was done in comparative hearings.
* Auctions are effective in assigning licenses to entities that value
them the most. Alternatively, with lotteries, FCC awarded licenses to
randomly-selected entities.
* Auctions are an effective mechanism for the public to realize a
portion of the value of a national resource used for commercial
purposes. Entities submitting winning bids must remit the amount of
their winning bid to the government, which represents a portion of the
value that the bidder believes will arise from using the spectrum. As
mentioned earlier, auctions have generated over $14.5 billion for the
U.S. Treasury.
Many industry stakeholders we contacted, and panelists on our expert
panel, stated that auctions are more efficient than previous mechanisms
used to assign spectrum licenses. For example, among our panelists, 11
of 17 reported that auctions provide the most efficient method of
assigning licenses; no panelist reported that comparative hearings or
lotteries provided the most efficient method. Of the remaining
panelists, several suggested that the most efficient mechanism depended
on the service that would be permitted with the spectrum.[Footnote 27]
Secondary Markets Provide an Additional Mechanism for Companies to
Acquire Licenses and Gain Access to Spectrum:
While FCC's initial assignment mechanisms provide one means for
companies to acquire licenses, companies can also acquire licenses or
access to spectrum through secondary market transactions. Through
secondary markets, companies can engage in transactions whereby a
license or use of spectrum is transferred from one company to another.
These transactions can incorporate the sale or trading of licenses. In
some instances, companies acquire licenses through the purchase of an
entire company, such as Cingular's purchase of AT&T Wireless.
Ultimately, FCC must approve transactions that result in the transfer
of licenses from one company to another.
In recent years, FCC has undertaken actions to facilitate secondary-
market transactions. FCC authorized spectrum leasing for most wireless
radio licenses with exclusive rights and created two categories of
spectrum leases: Spectrum Manager Leasing--where the licensee retains
legal and working control of the spectrum--and de Facto Transfer
Leasing--where the licensee retains legal control but the lessee
assumes working control of the spectrum. FCC also streamlined the
procedures that pertain to spectrum leasing. For instance, the Spectrum
Manager Leases do not require prior FCC approval and de Facto Transfer
Leases can receive immediate approval if the arrangement does not raise
potential public interest concerns.[Footnote 28] While FCC has taken
steps to facilitate secondary market transactions, some hindrances
remain. For example, some industry stakeholders told us that the lack
of flexibility in the use of spectrum can hinder secondary market
transactions.
Secondary markets can provide several benefits. First, secondary
markets can promote more efficient use of spectrum. If existing
licensees are not fully utilizing the spectrum, secondary markets
provide a mechanism whereby these licensees can transfer use of the
spectrum to other companies that would utilize the spectrum, thereby
increasing the amount of available spectrum and reducing the perceived
scarcity of spectrum.[Footnote 29] Second, secondary markets can
facilitate the participation of small businesses and introduction of
new technologies. For example, a company might have a greater incentive
to deploy new technologies that require less spectrum if the company
can profitably transfer the unused portion of the spectrum to another
company through the secondary market. Also, several stakeholders we
spoke to noted that secondary markets provide a mechanism whereby a
small business can acquire spectrum for a geographic area that best
meets the needs of the company.
Industry Stakeholders and Panelists Suggested Several Options to
Improve Spectrum Management:
Industry stakeholders and panelists on our expert panel offered a
number of options for improving spectrum management. The most
frequently cited options include (1) extending FCC's auction authority,
(2) reexamining the distribution of spectrum--such as between
commercial and government use--to enhance the efficient and effective
use of this important resource, and (3) ensuring clearly defined rights
and flexibility in commercially licensed spectrum bands. There was no
consensus on these options for improvements among stakeholders we
interviewed and panelists on our expert panel, except for extending
FCC's auction authority.
Extend FCC's Auction Authority:
Panelists on our expert panel and industry stakeholders with whom we
spoke overwhelmingly supported extending FCC's auction authority. For
example, 21 of 22 of panelists on our expert panel indicated that the
Congress should extend FCC's auction authority beyond the September 30,
2007 expiration date. As mentioned earlier, panelists and stakeholders
believe that auctions are more efficient than previous mechanisms used
to assign spectrum licenses; moreover, auctions are viewed as being
faster, less costly, and more transparent than the previous mechanisms.
Additionally, extending FCC's auction authority could generate
significant revenues for the government.[Footnote 30] However,
panelists and stakeholders also noted that the government should use
spectrum auctions to promote the efficient use of spectrum, not
necessarily to maximize revenues for the government.
While panelists on our expert panel overwhelmingly supported extending
FCC's auction authority, a majority also suggested modifications to
enhance the use of auctions.[Footnote 31] However, there was little
consensus on the suggested modifications. The suggested modifications
fall into the following three categories:
* Better define license rights. Some industry stakeholders and
panelists indicated that FCC should better define the rights
accompanying spectrum licenses, as these rights can significantly
affect the value of a license being auctioned. For example, some
industry stakeholders express concern with FCC assigning overlay and
underlay rights to frequency bands when a company holds a license for
the same frequency bands.[Footnote 32]
* Enhance secondary markets. Industry stakeholders we contacted and
panelists on our expert panel generally believe that modifying the
rules governing secondary markets could lead to more efficient use of
spectrum. For example, some panelists on our expert panel said that FCC
should increase its involvement in the secondary market. These
panelists thought that increased oversight could help to both ensure
transparency in the secondary market and also promote the use of the
secondary market. Additionally, a few panelists said that adoption of a
"two-sided" auction would support the efficient use of spectrum. With a
two-sided auction, FCC would offer unassigned spectrum and existing
licensees could make available the spectrum usage rights they currently
hold.
* Reexamine existing small business incentives. The opinions of
panelists on our expert panel and industry stakeholders with whom we
spoke varied greatly regarding the need for and success of FCC's
efforts to promote economic opportunities for small businesses. For
example, some panelists and industry stakeholders do not support
incentive programs for small businesses. These panelists and industry
stakeholders cited several reasons for not supporting these incentives,
including (1) the wireless industry is not a small business industry;
(2) while the policy may have been well intended, the current program
is flawed; or (3) such incentives create inefficiencies in the market.
Other industry stakeholders suggested alternative programs to support
small businesses. These suggestions included (1) having licenses cover
smaller geographic areas, (2) using auctions set aside exclusively for
small and rural businesses, and (3) providing better lease options for
small and rural businesses. Finally, some industry stakeholders with
whom we spoke have benefited from the small business incentive
programs, such as bidding credits,[Footnote 33] and believe that these
incentives have been an effective means to promote small business
participation in wireless markets.
Reexamine the Use and Distribution of Spectrum:
Panelists on our expert panel suggested a reexamination of the use and
distribution of spectrum to ensure the most efficient and effective use
of this important resource. One panelist noted that the government
should have a good understanding of how much of the spectrum is being
used. To gain a better understanding, a few panelists suggested that
the government systematically track usage, perhaps through a "spectrum
census." This information would allow the government to determine if
some portions of spectrum were underutilized, and if so, to make
appropriate allocation changes and adjustments.
A number of panelists on our expert panel also suggested that the
government evaluate the relative allocation of spectrum for government
and commercial use as well as the allocation of spectrum for licensed
and unlicensed purposes. While panelists thought the relative
allocation between these categories should be examined, there was
little consensus among the panelists on the appropriate allocation. For
instance, as shown in figure 3, 13 panelists indicated that more
spectrum should be dedicated to commercial use, while 7 thought the
current distribution was appropriate. No panelists thought that more
spectrum should be dedicated to government use. Similarly, as shown in
figure 4, nine panelists believed that more spectrum should be
dedicated to licensed uses, six believed more should be dedicated to
unlicensed uses, and five thought the current balance was appropriate.
Figure 3: Panelists' Views on the Allocation of Spectrum between
Commercial and Government Use:
[See PDF for image]
[End of figure]
Figure 4: Panelists' Views on the Allocation of Spectrum between
Licensed and Unlicensed Use:
[See PDF for image]
[End of figure]
Ensure Clearly Defined Rights and Flexibility:
Similar to a suggested modification of FCC's use of auctions, some
panelists on our expert panel suggested better defining users' rights
and increasing flexibility in the allocation of spectrum. Better
defining users' rights would clarify the understanding of the rights
awarded with any type of license, whether the licensees acquired the
license through an auction or other means. In addition, some panelists
stated that greater flexibility in the type of technology used--and
service offered--within frequency bands would help promote the
efficient use of spectrum. In particular, greater flexibility would
allow the licensee to determine the efficient and highly valued use,
rather than relying on FCC-based allocation and service rules. However,
some panelists on our expert panel and industry stakeholders with whom
we spoke noted that greater flexibility can lead to interference, as
different licensees provide potentially incompatible services in close
proximity.[Footnote 34] Thus, panelists on our expert panel stressed
the importance of balancing flexibility with interference protection.
Conclusions:
As commercial enterprises and government agencies increasingly utilize
spectrum to provide consumer services and fulfill important missions,
the management of spectrum to ensure its efficient use takes on greater
importance. Many industry stakeholders and panelists on our expert
panel told us that the current command-and-control process for
allocating spectrum is less effective than other approaches. As a
result, they stated that spectrum is not being fully utilized at all
times and perhaps not being used for its highest-value purposes. Yet,
few stakeholders or experts agree on how to improve the process. To
achieve greater consensus for reform of the spectrum management
process, we previously suggested that the Congress consider
establishing an independent commission that would conduct a
comprehensive examination of spectrum management.[Footnote 35]
One aspect of spectrum management that appears very effective is the
use of auctions for assigning licenses for commercial entities. As
implemented by FCC, spectrum auctions resolve problems associated with
previous assignment mechanisms, while giving rise to little or no
problems. Most stakeholders and experts with whom we spoke support
extending FCC's auction authority beyond the current expiration date of
September 30, 2007.
Matter for Congressional Consideration:
Given the success of FCC's use of auctions and the overwhelming support
among industry stakeholders and experts for extending FCC's auction
authority, the Congress should consider extending FCC's auction
authority beyond the current expiration date of September 30, 2007.
Agency Comments:
We provided a draft of this report to FCC, NTIA, and the Office of
Management and Budget for their review and comment. FCC provided
technical comments that we incorporated where appropriate. NTIA had no
comments on the draft. OMB concurred with our finding that auctions
have mitigated problems associated with comparative hearings and
lotteries and noted that the Administration supports the permanent
extension of FCC's auction authority. OMB also noted that the
Administration has proposed to give FCC authority to use economic
mechanisms to promote efficient spectrum use.
We are sending copies of this report to the appropriate congressional
committees. We are also sending this report to the Secretary of
Commerce, Chairman of the Federal Communications Commission, and the
Director of the Office of Management and Budget. We will also make
copies available to others upon request. In addition, the report will
be available at no charge on the GAO Web site at [Hyperlink,
http://www.gao.gov].
Should you have any questions about this report, please contact me at
202-512-2834 or [Hyperlink, heckerj@gao.gov]. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. Individuals making key contributions to
this report include:
Amy Abramowitz, Stephen Brown, Emilie Cassou, Michael Clements, Nikki
Clowers, Kate Magdalena Gonzalez, Eric Hudson, Terri Russell, Mindi
Weisenbloom, and Alwynne Wilbur.
Signed by:
JayEtta Z. Hecker, Director, Physical Infrastructure Issues:
[End of section]
Appendixes:
Appendix I: Scope and Methodology:
The Commercial Spectrum Enhancement Act required us to review the
Federal Communications Commission's (FCC) commercial spectrum licensing
process. The objectives of our study included examining the (1)
characteristics of the current spectrum allocation process for
commercial uses; (2) impact of the assignment process--specifically the
adoption of auctions to assign spectrum licenses--on end-user prices,
infrastructure deployment, competition, and entry and participation of
small businesses; and (3) options for improving spectrum management.
To address all three objectives, we conducted a comprehensive,
structured literature review of economic, legal, and public policy
material relevant to spectrum issues. Our literature review included
domestic studies on spectrum management that were published in the last
25 years. To identify articles for our literature review, we searched a
number of databases, including LexisNexis, Hein Online, Westlaw, and
ProQuest, using key terms such as "spectrum," "assignment," and
"license." We eliminated articles and studies from our literature
review that did not directly relate to our objectives or did not
provide original analysis. We also considered the methodological
soundness of the articles and studies included in our literature
review; we determined that the findings of these studies were
sufficiently reliable for our purposes.
We also extracted data from FCC's license databases (Universal
Licensing System, Consolidated Database System, and International
Bureau Filing System) to determine the distribution of active licenses
among different segments of the wireless industry and to identify the
largest holders of licenses. To assess the reliability of the
information from these databases, we interviewed FCC officials
responsible for the databases about their data collection and
verification policies, and procedures for license information. We also
electronically tested the databases. We concluded that information from
FCC's license databases was sufficiently reliable for the purposes of
this report. In addition, we interviewed FCC, National
Telecommunications and Information Administration, and Office of
Management and Budget officials and conducted semi-structured
interviews with representatives from academia and the wireless industry
to obtain a broad range of perspectives on spectrum allocation and
assignment issues. We selected representatives from academia and the
wireless industry based on their organization's vested interest in
spectrum policy, or their expertise in spectrum policy as represented
by presentations or publications. (Table 1 lists the companies,
academic institutions, or other entities of the representatives we
interviewed.)
Table 1: List of non-government interviewees:
Alaska Native Broadband 1 License, LLC.
Arraycomm.
Bear Stearns.
Brattle Group.
Cingular.
Consumers Energy Company.
CSIS.
CTIA.
Dobson.
Enterprise Wireless Allocation.
Hogan and Hartson LLP.
Information Technology Industry Council.
Intel.
Lockheed Martin.
Lucent Technologies.
Manhattan Institute.
Metro PCS.
Mobile Relay Associates.
Motorola.
National Association of Broadcasters.
New America Foundation.
New Skies Satellites.
Nextel.
Prudential Financial.
Stanford University.
Sprint PCS.
T-Mobile.
United Telecom Council.
University of California, Berkley.
University of Maryland.
University of Pennsylvania.
Verizon Wireless.
Yale Law School.
Source: GAO.
[End of table]
We also contracted with the National Academies to convene a balanced,
diverse panel of experts to discuss spectrum allocation and assignment
issues and options to improve spectrum management in the future. We
worked closely with the National Academies to identify and select 23
panelists who could adequately respond to our general and specific
questions about spectrum allocation, assignment processes, and options
for improvement. In keeping with National Academies policy, the
panelists were invited to provide their individual views, and the panel
was not designed to reach a consensus on any of the issues that we
asked them to discuss. The panelists convened at the National Academies
in Washington, D.C., on August 9 and 10, 2005. Twelve panelists
participated on the panel on August 9, 2005; eleven panelists
participated on the panel on August 10, 2005. (See table 2 for the list
of panelists on each day.) The agendas and questions were identical for
both days. To start each day, the panel moderators provided an overview
of the issues to be discussed; during the remainder of the day, the
panelists addressed the questions we had provided for their
consideration. At the end of the each session, we asked the panelists
to individually answer a short series of questions about the topics
discussed in order to more systematically capture individual panelists'
views on key dimensions. We did not verify the panelists' statements,
although we did ask the panelists, in some instances, to clarify
certain details. The views expressed by the panelists do not
necessarily represent the views of GAO or the National Academies.
Table 2: Panelists on GAO/National Academies expert panel:
August 9, 2005:
Name: Dale Hatfield (moderator);
Affiliation: August 9, 2005: Independent consultant and Adjunct
Professor, University of Colorado, Boulder.
Name: Peter Cramton;
Affiliation: August 9, 2005: Professor, University of Maryland, College
Park.
Name: David Donovan;
Affiliation: August 9, 2005: President, Association for Maximum Service
Television, Inc..
Name: Gerald Faulhaber;
Affiliation: August 9, 2005: Professor, The Wharton School, University
of Pennsylvania.
Name: Bruce Franca;
Affiliation: August 9, 2005: Deputy Chief, Office of Engineering and
Technology, Federal Communications Commission.
Name: Ellen Goodman;
Affiliation: August 9, 2005: Associate Professor, Rutgers School of
Law, Camden.
Name: Mark McHenry;
Affiliation: August 9, 2005: President, Shared Spectrum.
Name: William Moroney;
Affiliation: August 9, 2005: President and CEO, United Telecom Council.
Name: Charla Rath;
Affiliation: August 9, 2005: Executive Director, Spectrum and Public
Policy, Verizon Wireless.
Name: David Reed;
Affiliation: August 9, 2005: Fellow, HP Labs and Adjunct Professor,
Massachusetts Institute of Technology.
Name: Steve Sharkey;
Affiliation: August 9, 2005: Director, Spectrum and Standards Strategy,
Motorola, Inc..
Name: Badri Younes;
Affiliation: August 9, 2005: Director, Spectrum Management, Department
of Defense.
August 10, 2005.
Name: Gregory Rosston (moderator);
Affiliation: August 9, 2005: Deputy Director, Stanford Institute for
Economic Policy Research, Stanford University.
Name: Paul Besozzi;
Affiliation: August 9, 2005: Attorney, Patton Boggs, LLP.
Name: Diane J. Cornell;
Affiliation: August 9, 2005: Vice President, Regulatory Policy,
Cellular Telecommunications and Internet Association.
Name: Joe Gattuso;
Affiliation: August 9, 2005: Senior Policy Advisor, Office of the
Assistant Secretary, National Telecommunications and Information
Administration.
Name: Kalpak Gude;
Affiliation: August 9, 2005: Vice President, Government Regulatory
Affairs and Associate General Counsel, PanAmSat.
Name: Thomas W. Hazlett;
Affiliation: August 9, 2005: Professor of Law and Economics, George
Mason University.
Name: Dewayne Hendricks;
Affiliation: August 9, 2005: CEO, The Dandin Group.
Name: Kevin Kahn;
Affiliation: August 9, 2005: Intel Senior Fellow, Communications
Technology Lab, Intel Corporation.
Name: David Sidall;
Affiliation: August 9, 2005: Attorney, Paul, Hastings, Janofsky &
Walker, LLP.
Name: Jennifer Warren;
Affiliation: August 9, 2005: Senior Director, Trade & Regulatory
Affairs, Lockheed Martin.
Name: Jimmy R. "Rusty" Williams;
Affiliation: August 9, 2005: Infrastructure Services Manager, Planning
& Engineering, Southern Company Services.
Source: GAO.
[End of table]
After the expert panel was conducted, we analyzed a transcript of the
panel's discussion and survey responses in order to identify principal
themes and panelists' views. The results of the expert panel should be
interpreted in the context of two key limitations and qualifications.
First, although we were able to secure the participation of a balanced,
highly qualified group of experts, there are other experts in this
field who could not be included because of the need to limit the size
of the panel. Although many points of view were represented, the panel
was not representative of all potential views. Second, even though we
conducted preliminary research, in cooperation with The National
Academies, and heard from national experts in their fields, two panels
cannot represent the current practice in this vast arena. More thought,
discussion, and research must be done to develop greater agreement on
what is really known, what needs to be done, and how to do it. These
two key limitations and qualifications provide contextual boundaries.
Nevertheless, the panel provided a rich dialogue on spectrum allocation
and assignment issues, as well as options for improving spectrum
management in the future; the panelists also provided insightful
comments in responding to the questions posed to the panel.
(544100):
FOOTNOTES
[1] Mobile telephones and garage door openers are examples of
technologies deployed, respectively, in licensed bands of spectrum and
in bands that permit unlicensed uses.
[2] The Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-66,
§6002, 107 Stat. 312, 387-392 (the 1993 Budget Act), added section
309(j) to the Communications Act of 1934, as amended. Section 309(j)
authorizes FCC to use competitive bidding to assign licenses for
certain services.
[3] Pub. L. 108-494, 118 Stat. 3986, tit. II (2004). The Act required
us to report findings to the committees of jurisdiction by September
19, 2005. In September and October 2005, we briefed the Senate Commerce
Committee staffs and provided copies of the briefing material to the
House Commerce Committee staffs, respectively. Also, as requested, we
issued a report in November that summarized and transmitted the
briefing materials to the committees of jurisdiction. See GAO,
Telecommunications: Preliminary Information on the Federal
Communications Commission's Spectrum Allocation and Assignment Process,
GAO-06-212R (Washington, D.C.: Nov. 10, 2005).
[4] The task force report was a product of FCC staff, and not formally
adopted by the full Commission.
[5] "Sunk costs" are costs that have been incurred and cannot be
reversed, such as paying for spectrum rights at an auction.
[6] At the end of each panel session, we asked the panelists to
individually answer a short series of questions about the topics
discussed in order to more systematically capture individual panelist
views on key dimensions. Twenty-two of the twenty-three panelists
responded to the questions we posed at the end of each session.
[7] See GAO, Telecommunications: Comprehensive Review of U.S. Spectrum
Management with Broad Stakeholder Involvement Is Needed, GAO-03-277
(Washington, D.C.: January 31, 2003).
[8] Radio signals travel through space in the form of waves. These
waves vary in length, and each wavelength is associated with a
particular radio frequency. Radio frequencies are grouped into bands
and are measured in units of Hertz. The term kilohertz refers to
thousands of Hertz, megahertz (MHz) to millions of Hertz, and gigahertz
to billions of Hertz.
[9] The Department of State also plays a role in spectrum management by
coordinating and mediating the U.S. position and leading the nation's
delegation to international conferences on spectrum management.
[10] Interference occurs when two or more radio signals interact in a
manner that disrupts the transmission and reception of messages.
[11] Additionally, some licenses are assigned through a frequency
coordination process. Licenses for geostationary satellite orbit
systems are assigned using a first-come, first-served approach.
[12] Traditional unlicensed devises are low-powered devices that
operate in a limited geographic range, such as cordless phones, baby
monitors, garage door openers, and wireless access to the Internet.
[13] The Balanced Budget Act of 1997, Pub. L. No. 105-33, 111 Stat.
260, tit. III, § 3002, terminated FCC's authority to assign licenses by
lotteries, except with respect to licenses for non-commercial broadcast
stations and public broadcast stations. See, 47 U.S.C. § 309(i)(5) and
47 U.S.C. § 397(6).
[14] The 1993 Budget Act established four policy objectives for FCC's
use of auctions: (1) the development and rapid deployment of new
technologies, products, and services; (2) the promotion of economic
opportunity and competition and the dissemination of licenses among a
wide variety of applicants, including small businesses; (3) the
recovery for the public of a portion of the value of the public
spectrum resource; and (4) the efficient and intensive use of spectrum.
Additionally, in 1997, the Congress added a fifth objective to ensure
that in scheduling auctions FCC allows adequate time for notice and
comment, and for potential participants to develop business plans,
assess market conditions, and evaluate the availability of equipment.
See 47 U.S.C. § 309(j)(3). In the Commercial Spectrum Enhancement Act,
Congress added a sixth objective for auctions requiring the recovery of
110 percent of estimated costs to relocate federal users from
frequencies transferred to nonfederal use. See 47 U.S.C. §
309(j)(3)(F).
[15] For spectrum that is not auctioned, the Administration proposed in
its fiscal year 2006 budget to provide FCC authority to use economic
mechanisms, such as fees, to promote efficient spectrum use. According
to OMB, this proposal would provide FCC the authority to set user fees
on unauctioned spectrum licenses based on public-interest and spectrum-
management principles, and would promote efficient spectrum use by
internalizing the value of spectrum to license holders.
[16] The task force report was a product of FCC staff, and not formally
adopted by the full Commission.
[17] The President established the Federal Government Spectrum Task
Force through an Executive Memorandum in May 2003. See Memorandum on
the Spectrum Policy for the 21st Century, 39 Weekly Comp. Pres. Doc.
726 (June 9, 2004).
[18] See GAO-03-277.
[19] NTIA employs a similar process for federal government spectrum
users.
[20] Mark McHenry and Dan McCloskey, New York City Spectrum Occupancy
Measurements September 2004, Shared Spectrum Company, subcontract with
University of Kansas Center for Research, Inc. (Vienna, VA: Dec. 2004).
[21] Section 301 of the Act provides that the government can authorize
the use--but not the ownership--of the spectrum. See, 47 U.S.C. § 301.
[22] For more information on these technologies, see Gerald R.
Faulhaber and David Farber, "Spectrum Management: Property Rights,
Markets, and the Commons" (Washington, D.C.: 2002).
[23] See Evan Kwerel, "Spectrum Auctions Do Not Raise the Price of
Wireless Services: Theory and Evidence," (Washington, D.C.: 2000),
http://wireless.fcc.gov/auctions/default.htm?job=papers_studies
(downloaded Dec. 14, 2005).
[24] At the end of each panel session, we asked the panelists to
individually answer a short series of questions about the topics
discussed in order to more systematically capture individual panelist
views on key dimensions. Twenty-two of the twenty-three panelists
responded to the questions we posed at the end of each session. The
number of panelists responding to particular questions ranged from 17
to 22.
[25] In authorizing FCC to use competitive bidding, the Congress
mandated that FCC "ensure that small businesses, rural telephone
companies, and businesses owned by members of minority groups and women
are given the opportunity to participate in the provision of spectrum-
based services." See 47 U.S.C. § 309(j)(4)(D). In addition, the
Communications Act requires that in establishing eligibility criteria
and bidding methodologies, FCC disseminate licenses among a wide
variety of applicants. See 47 U.S.C. 309(j)(3)(B).
[26] There are several instances where the public captures some value
arising from commercial entities using government-controlled resources.
For example, the federal government auctions offshore oil and gas
drilling rights, collects royalties for mineral extraction on federal
lands, and collects grazing fees.
[27] For example, some panelists do not support using auctions to
assign spectrum licenses for public safety services.
[28] The public interest concerns arise as a result of FCC policies
pertaining to (1) eligibility and use of the license and spectrum, (2)
foreign ownership limitations, (3) designated entity and entrepreneur
benefits, and (4) competition. See Promoting Efficient Use of Spectrum
Through Elimination of Barriers to the Development of Secondary
Markets, WT Docket No. 00-230, Second Report and Order, Order on
Reconsideration, and Second Further Notice of Proposed Rulemaking, 19
FCC Rcd. 17503 (2004).
[29] FCC has also established rules that allow licenses in many
wireless services to partition or disaggregate their licenses.
Partitioning involves subdividing the geographic area a licensee serves
and disaggregation involves subdividing the spectrum associated with
the licenses.
[30] For example, the Congressional Budget Office recently estimated
that an auction of 60 MHz of spectrum currently used by broadcasters
would generate auction revenues of $10 billion. See Congressional
Budget Office, Cost Estimate: Digital Transition and Public Safety Act
of 2005 (Washington, D.C.: October 24, 2005).
[31] Fifteen of twenty-two panelists suggested modifications to enhance
the use of auctions.
[32] Underlay rights allow unlicensed users to operate in the same
spectrum bands as licensees, as long as the unlicensed users do not
cause undue interference for licensees. For example, ultra-wideband
technology operates at very low power levels over a very wide range of
spectrum, and thus might avoid interfering with licensed spectrum users
in the same spectrum bands. Overlay rights allow unlicensed users to
operate in licensed spectrum bands during times or in geographic areas
where licensees are not using the spectrum.
[33] A bidding credit is a percentage discount applied to the high bid
amount if the bidder meets designated entity criteria established in
the auction rules.
[34] With the current allocation process, FCC attempts to keep
incompatible service separated to avoid interference. With licensees
exerting greater control, this protection could be reduced.
[35] GAO-03-277.
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