SENATE APPROPRIATORS RAISE CONCERNS ABOUT SPECTRUM AUCTION COSTS

A Hollings spokesman said the appropriators want to be sure the fund is being used properly and there’s appropriate congressional oversight. Gregg’s office hadn’t returned calls by our deadline. FCC officials said they regularly met with Capitol Hill staff on the specifics of the auction costs, but hadn’t received any direct queries from members concerned about the auction expense. There has been no report on auction costs by the General Accounting Office (GAO), officials said, which one source said would be a natural step for Congress to take before eliminating the budget item. Such a change in funding usually would include accompanying report language explaining the deletion, which it did not, a source said.

There has been speculation among Capitol Hill staffers on why the funding was cut. They said it appeared to be a budget measure designed to score the appropriations bill lower, but a Senate source said the score could be much higher since the FCC’s auction authority could be threatened. The House CJS bill left the FCC’s auction authority intact, and a Senate source said it was likely to be returned to the Senate version.

The removal of the auction item also drew concern from Senate Commerce Committee Chmn. McCain (R-Ariz.), who in a Sept. 12 letter to Senate Appropriations Chmn. Stevens (R- Alaska) said the fund should be returned to the FCC. McCain said the auction provision directly contravened current law “without a single hearing or justification.” “The FCC has stated that such a change would force the agency immediately to suspend all auction activity, which will have a direct negative impact on the receipt estimates contained in the President’s budget for FY 2004 and all out-year estimates,” McCain wrote.

Several Capitol Hill staffers have questioned why auctions cost so much. “Can’t they just use Sotheby’s?” one asked. But FCC officials said that they couldn’t and that the auction system the agency created was -- and must be -- state-of-the-art. Along with information technology (IT) costs, there are significant costs to audit and manage the multibillion-dollar auctions, they said. Personnel costs also contribute to the program’s expense, FCC officials said.

The cost of conducting auctions has risen gradually since the program started, but FCC officials said it now appeared that the costs are leveling and should stay around $100 million per year. In 1997, the FCC said spent $25.2 million to conduct its auction. It requested $97 million to run this year’s auction. In 2001, the auction cost $75 million and in 2002 were $93.6 million, the agency said in reports filed with Congress. Staffers said many of the startup and development costs had been contained, and should stay relatively level.

FCC officials said IT consulting and equipment were part of the cost of running auctions, which has been recognized for its innovative technology and design. Mexico purchased a license to use the system -- which was copyrighted by the FCC -- to run its own auctions.

FCC officials said spectrum auctions generated a solid return on investment. For every dollar spent to run the auction, they estimated it brought in nearly $30. Since beginning auctions in 1994, the FCC has deposited nearly $14.4 billion in cash into the U.S. Treasury. It cost $384 million to run the program in the same period. And officials said $5.3 billion more was due to the Treasury from auction proceeds, not counting from bankrupt companies. If bankrupt companies were included, it could be as much as $11 billion, they said.

The delayed payments, along with the large sums of money the auction raises, generate one of the larger expense items. Financial accounting of the billions of dollars brought in through auctions has become a “significant expense,” FCC officials said. Of the $93.5 million spent in 2002, nearly $47.5 million went to contracting and other services, including IT. Included in the contracting costs was nearly $4.2 million for Ernst & Young financial auditing service. Chase Manhattan Bank was paid nearly $1.9 million for charges related to loan servicing in 2002. FCC officials said the cost of legal talent used to defend the agency in the NextWave and other auction related cases was smaller than the financial service costs associated with collecting auction proceeds.

IT costs and costs associated with keeping the database up to date are significant, FCC officials said. The 2002 report showed AAC Assoc. was paid $3.7 million for “integration and support services.” Computech was paid $6.7 million, $2.1 million and $1.1 million in separate line items for software and programming support. FCC officials said the auction program must be able to support the most up-to-date technology, along with older technology, so as to accommodate any potential bidder. The system even supports telephone bids for those uncomfortable with a computer auction system, FCC officials said.

The revenue being brought into the Treasury justifies the costs, FCC officials said. When the budget crisis forced a govt. shutdown in 1995, the FCC was in midst of an auction and continued to run, agency officials said, primarily because the auction was deemed too important to stop. The importance of auctions led the FCC to establish a back-up auction site in Gettysburg, Pa., which also is a state-of- the-art facility, Commission sources said. Vistronix was paid $1 million for technical information support for the Gettysburg auction site in 2002.

The importance of the auctions also requires extensive security measures, FCC officials said -- at least $1.25 million in 2002. They said the security expenses have worked as computer viruses that have affected other parts of the FCC haven’t been able to touch the auction network. “In a billion-dollar auction, you need to have a high level of reliability against network failure,” an FCC official said.

There also are significant personnel costs associated with the auction program. FCC officials said 300 full-time- equivalent (FTEs) employees are used in the program. In 1997, auction personnel costs and benefits were $6.6 million and $27.7 million in 2002. And since the nearly 300 FTEs amount to 14% of the Commission’s total staff of nearly 2,000, the percentage of the FCC’s total operating costs also is applied to auction funding. That’s 14% of the rent, electric bill and other essential expenses, for example.

The FCC also had costs of updating the auction model. The 1997 Balanced Budget Act ordered it to investigate and report on a “combinatorial” bidding system that would allow potential bidders to bid on a combination or group of licenses and enter multiple alternative bids in a single round. McCain (R-Ariz.) pushed to have the study included in the bill. Since then, the FCC has nearly fully implemented that system, it said, but there were costs associated with studying and creating the system.