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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
• 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             2
                 WP_38_Presentation.3.11.04
   Only about 7% (185 MHz) of
Spectrum in 300-3000 MHz Range
Is Fully Available to Market Today

                 PCS 3%
     Cellular 2%
                     SMR 1%
                                          Cellular 50 MHz
                                          PCS 120 MHz
                                          SMR 15 MHz
                                          Other 2545 MHz




                  Evan Kwerel                           3
             WP_38_Presentation.3.11.04
Another 15 % (413 MHz) for
Flexible Use in the Pipeline
         From TV
         Channels                From
           52-69              MDS/ITFS
         (78 MHz)             (190 MHz)
            3%                    6%    From Gov't,
                                         MSS and
                                          others
                                        (145 MHz)
                                           5%




              Evan Kwerel                             4
         WP_38_Presentation.3.11.04
                   But…
• Heavily encumbered
• Fragmented in geographic and frequency
  domains
• Needs massive restructuring




                    Evan Kwerel             5
               WP_38_Presentation.3.11.04
                  TV and that Encumber Channel 67 in EAG-1
      TV and DTV StationsDTV Stations on Channel 67 (Buffered)

                                                                                                          Service
                                                                                                           DT
                                                                                                           TV




                                                                                                  66 68
                                                                                                  66 68
                                                                  68
                                                                  68

                      66
                      66
                                                    67
                                                    67           Northeast EAG - 1

                                            66
                                            66                                       66
                                                                                     66      67
                                                                                             67
                                                                                        68
                                                                                       68
        Great Lakes EAG - 4
 66
 66
                                     67
                                     67
                                                                             67
                                                                             67
                                68
                                68
                                                            68
                                                            68
                                                                    67
                                                                    67


                                     Mid-Atlantic EAG - 2         66
                                                                  66




                 68
                 68            67
                               67
                              67
                              67

April 18, 2000                                                                                              Federal Communications Commission
                                                                                                            Office of Engineering and Technology
                                                                                                                            Melvin C. Del Rosario

                                                              Evan Kwerel                                                                    6
                                                         WP_38_Presentation.3.11.04
Percent of MHz-Pops Encumbered on TV
   Channels 60-69 in Northeast EAG
        Percent of Pops Encumbered in EAG1 (Northeast) on Paired
                        Channels 60-69 (buffered).
                     Total Pops in Area = 41,569,094
 100

  90                               85.03
                                                   82.39
                    77.30
  80                                                               74.88

  70   65.53

  60

  50

  40

  30

  20

  10

  0
       60/65        61/66          62/67           63/68           64/69




       C                    D Kwerel
                             Evan                                          7
                      WP_38_Presentation.3.11.04
       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
 746                                                                                                            806



             C1           D1                  PS            C2           D2                   PS
59           60          61     62       63        64       65          66     67        68            69



WBNE                           WRNNTV                     WHSPTV                       WHSETV

        WBPHTV                          WMBCTV                                WHSITV

                        WPPX                               WEDY                                   WFMZTV

                    WTICTV

                                WACI

                                                                                       Spectrum encumbered by:
                                                                                       One station:
                                                                                       Two stations:
                                                                                       Three or more:


                                               Evan Kwerel                                                  8
                                          WP_38_Presentation.3.11.04
  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                        9
                     WP_38_Presentation.3.11.04
  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             10
                 WP_38_Presentation.3.11.04
         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                  11
                  WP_38_Presentation.3.11.04
           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                        12
                      WP_38_Presentation.3.11.04
       Initial Implementation
• 413 MHz in the 300 to 3000 MHz range
• Reduce current spectrum shortages for high
  demand uses




                     Evan Kwerel             13
                WP_38_Presentation.3.11.04
  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                 14
                  WP_38_Presentation.3.11.04
  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                       15
                      WP_38_Presentation.3.11.04
      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                16
                     WP_38_Presentation.3.11.04
     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                   17
                   WP_38_Presentation.3.11.04
           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                18
                  WP_38_Presentation.3.11.04
              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             19
                     WP_38_Presentation.3.11.04
          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                            20
                        WP_38_Presentation.3.11.04
                          Alternative Band Plans
A1        A2        A3        A4        C1        C2            C3        C4        E1        E2            E3        E4        G1        G2        G3        G4




                                                                                                                                                                   resp.
                                   B4        D1        D2            D3        D4        F1        F2            F3        F4        H1        H2        H3
     B1        B2        B3
                                                       Current Channel Plan

                                                       J band




                                                                                                   K band
     A              B              C         D                  A B C D E F G                                    E              F          H             G

     16.5 megahertz blocks
                                                  Coalition Band Plan
                                                                                                                       16.5 megahertz blocks




                                                            Evan Kwerel                                                                                               21
                                                       WP_38_Presentation.3.11.04
             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             22
               WP_38_Presentation.3.11.04
             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                23
                WP_38_Presentation.3.11.04
              MDS/ITFS
        Band 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                   24
                   WP_38_Presentation.3.11.04
              MDS/ITFS
           Voucher 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                25
                 WP_38_Presentation.3.11.04
           MDS/ITFS
    Vouchers 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             26
                WP_38_Presentation.3.11.04
           MDS/ITFS
 Voucher 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             27
               WP_38_Presentation.3.11.04
     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                     28
                      WP_38_Presentation.3.11.04
    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             29
                WP_38_Presentation.3.11.04
   Thank You
For More Information
• OSP Working Paper No. 38
  www.fcc.gov/osp/workingp.html
• evan.kwerel@fcc.gov


              Evan Kwerel             30
         WP_38_Presentation.3.11.04

				
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