CTIA, Major Carriers Say Predictability Key if FCC Revises Spectrum Screen

Meanwhile, the FCC Thursday delayed the deadline for comments on the second NPRM it approved at its Sept. 28 meeting covering rules for an incentive auction of TV stations’ spectrum. The agency partly granted NAB and CTIA’s joint request for more time (CD Nov 23 p10), delaying the filing deadline by almost a month total to Jan. 25 for comments and March 12 for replies (http://xrl.us/bn334m).

CTIA said a screen by itself is no substitute for bringing more spectrum online for wireless broadband (http://xrl.us/bn33oy). The screen must be “clear and predictable,” CTIA said. “Properly crafted, a spectrum screen can provide more certainty regarding which investments will be permitted and which will require further review. A screen thus preserves flexibility for the Commission to assess competitive conditions in markets where the screen is triggered, while reducing administrative costs associated with case-by-case review.” The return of a spectrum cap, as proposed by the Rural Telecommunications Group (CD Nov 29 p 12) isn’t the answer, CTIA said. Arguments CTIA made against a cap 11 years ago are equally true today, the association said. “Regulatory constraints on spectrum can produce a misallocation of resources, forcing constrained carriers to employ excessive amounts of non-spectrum inputs in lieu of utilizing additional spectrum.” That would translate into “higher prices and reduced service options,” CTIA said.

T-Mobile, in the market for more spectrum and poised to buy MetroPCS, urged caps for rights to airwaves acquired via auction, but the continued use of a screen for secondary market deals. The auction cap should be “hard” and based on the current screens, blocking any carrier from holding more than a third of the spectrum available for “mobile wireless services” in any given market, T-Mobile said (http://xrl.us/bn33v5). A case-by-case analysis still makes sense for other transactions, it said. “The considerations militating in favor of caps for auctions do not generally apply in transactions. In auctions, the inability to assess whether the FCC would permit spectrum aggregation affects other parties in the auction, not only the bidder. In transactions, only the parties themselves are directly affected by the Commission’s evaluation of spectrum holdings."

Sprint Nextel also proposed a cap for spectrum below 1 GHz that would apply “prospectively to both Commission spectrum auctions and secondary market transactions, including the incentive auction the Commission will be conducting for broadcast TV spectrum.” Not applying the cap to spectrum leased or subleased “pursuant to an arm’s length agreement, would help to ensure a more competitive distribution of spectrum below 1 GHz to enhance competition,” Sprint said (http://xrl.us/bn3362). “The Commission should also revise its spectrum screen (which should similarly apply to licensed but not leased or sub-leased spectrum rights) to weight different bands according to estimates of their relative utility in the provision of mobile telephony/broadband services."

Current Screen Called ‘Broken'

Some commenters want far-reaching changes. The Competitive Carriers Association said the current screen is “broken” and has not done enough to keep Verizon Wireless and AT&T from buying enough spectrum to give them a major advantage over their competitors. CCA noted that the screen approach was adopted by the FCC almost a decade ago, before the most recent wave of consolidation (http://xrl.us/bn33rt). “Among other things, the current screen fails to account for important differences between high and low frequency spectrum bands, includes certain bands that are unsuitable for mobile broadband while excluding bands that are (or will soon be) suitable, and largely ignores the competitive effects of spectrum aggregation at the national level,” CCA said. “The spectrum screen has become a shield for AT&T and Verizon to avoid competitive scrutiny, rather than a sword for combating the harmful effects of spectrum aggregation.” CCA urged the FCC to adopt a “rebuttable presumption” against transactions that result in spectrum holdings above the screen in any area. To update the screen, it should exclude “bands that no longer appear to be suitable for mobile broadband” like 12.5 MHz in the specialized mobile radio band and 10 MHz in the upper 700 MHz D block, and include “significant bands, such as the WCS spectrum being acquired by AT&T,” the filing said.

Public Knowledge said the FCC should develop a much more sophisticated screen for spectrum holdings, in comments written by former FCC Chief Technologist Jon Peha. The screen shouldn’t treat all spectrum the same, the group said. “Radio transmissions at different frequencies have different physical properties, and no man-made law or regulation can change this,” the filing said (http://xrl.us/bn33ti). “There is ample quantitative evidence that the value of spectrum depends on frequency, and that the differences are so great that any spectrum screen that treats all frequency bands the same is inadequate to the task, and will become even more inadequate in the future as [carriers] employ a more diverse set of frequency bands.” The FCC should take into consideration whether a carrier is deploying services on the spectrum it already has, the nonprofit said. “One sign that a carrier is building its spectrum holdings not primarily to provide services at low cost but to increase costs for its competitors is that the carrier will use some of its spectrum inefficiently or not at all."

The FCC should perform a three-step analysis of spectrum holdings, Free Press said. “In the first stage of this analysis, the Commission would determine if the proposed acquisition would result in an applicant controlling more than 35 percent of the suitable and available spectrum in a given local market.” If a carrier passes the first test, the agency should examine the “impact of the proposed transfer on the concentration of spectrum holdings in a given local market, measured by the well-established standards” in the Justice Department’s horizontal merger guidelines, Free Press said. In the third stage, it said the FCC should examine “the applicant’s particular spectrum holdings (including its holdings below 1 GHz, which would be subjected to a separate cap); the impact of the transaction on retail market competition; the applicant’s non-acquisition alternatives to meet its stated needs; the potential for future market entry by other competitors; and other factors that impact market competition."

AT&T and Verizon Wireless offered comments in line with CTIA. “A transparent and straightforward spectrum screen with a safe harbor for transactions below the screen will bring needed clarity and certainty to the Commission’s review of spectrum acquisitions,” Verizon said (http://xrl.us/bn33qb). “The Commission should also reject any consideration of reimposing a spectrum cap, which is an inherently inflexible tool ill-suited to the dynamic spectrum market, and which can block spectrum transactions that are clearly pro-consumer.” Verizon said the FCC should continue to set a screen reflective of about one-third of the spectrum in any market. “This is a conservative measure designed to ensure that there is no risk to competition posed by spectrum holdings below that level,” the company said. “This is particularly conservative considering the overall amount of spectrum in the market and the Government’s commitment to repurposing an additional 300 MHz of spectrum for wireless broadband by 2015 and 500 MHz by 2020.”

AT&T said certainty and a mechanism for updating the screen are key. “Despite the enormous consumer benefits that have resulted from the safe harbor screen, recent and proposed changes in the way the screen is applied are creating marketplace uncertainty and leading to arbitrary results that threaten to reduce competition, investment, and innovation,” the company said (http://xrl.us/bn33qu). “The lack of predictability is exacerbated by indications that the screen is becoming a tool to manage competitive outcomes and boost the prospects of individual competitors."

The FCC should promote stability in the market, whether or not it further revises the screen, the Competitive Enterprise Institute’s Communications Liberty and Innovation Project said (http://xrl.us/bn333e). The screen adopted in 2004 “remains analytically sound,” the group said. “The framework unraveled when the FCC began altering it in the midst of ongoing transaction and licensing proceedings. A stable regulatory environment encourages voluntary market participation and discourages strategic manipulation. Recent FCC decisions have destabilized the regulatory environment and created additional uncertainty in the secondary markets and FCC auctions. This uncertainty harms consumers and benefits no one but rent seekers."

FCC Changes Expected

The FCC is likely to make some major changes to its rules as a result of the rulemaking, said Jeff Silva, analyst at Medley Global Advisors. Chairman Julius Genachowski and staff seem to be “putting significant thought and resources into the spectrum holdings proceeding, given the critical importance of limited airwaves in the evolving mobile broadband space and their desire to maintain a semblance of sustainable competition going forward,” Silva told us Thursday. “I would anticipate substantive policy changes with a measure of built-in flexibility when the dust settles. Without a degree of regulatory flexibility, new FCC guidelines could invite unintended consequences for industry and undermine overarching agency policy objectives as well. It’s possible that reinstating a hard spectrum cap could contribute to such a scenario."

Free State Foundation President Randolph May also expects change. “Given the current commission majority, I think it is fairly likely the agency will adopt a new rule that represents a real change from the current policy,” he said. “At least in theory, you would think the commission would want to act before it conducts further auctions. But after reviewing some of the comments, I'm pretty wary that action by the commission will improve matters. For example, suggestions by some, like Free Press and Public Knowledge, urging the agency to engage in a much more complicated analysis to differentiate among spectrum bands and the like, are unlikely to be flexible enough to be sound over time in a dynamic market. There are even differences among the commenters concerning the import of a spectrum ’screen’ versus a ‘cap.’ While I'm in favor of regulatory certainty, I'm not too optimistic that the outcome of the proceeding will be more certainty."

"There’s a widespread understanding that the screen needs to be revised,” Public Knowledge Staff Attorney John Bergmayer said by email. “This becomes all the more important with the incentive auction proceeding -- otherwise, they could end up harming competition instead of helping it. I don’t think the FCC would have begun this proceeding at all unless it intended to reform the screen in some way. One possible problem with a hard cap is that it implies that spectrum holdings that come in under the cap are in a safe harbor. PK has come to think that a screen offers more flexibility and allows the commission to take into account particular circumstances where it’s hard to craft a hard and fast rule ahead of time. But the discussion about whether there should be a cap, or a screen[,] has to be preceded by a weighting analysis that takes into account how valuable different frequencies actually are. It’s hard to say what the screen should be when you don’t even know what the proper unit of measure is. It would be like a recipe that calls for ‘3 of flour, 1 of salt.'”