Broadcaster Repacking Rules Raise Risk Incentive Auction Could Be Overturned in Federal Court, McDowell Says

"Because this literally will be the most complicated spectrum auction in history, and I'm not predicting this will happen, I'm just saying there’s a … slightly elevated litigation risk,” McDowell said. “With repacking for broadcasters, you introduce the concept of irreparable harm. While no spectrum auction has ever been set aside by a court, I think there’s a slightly elevated risk that this one could be."

The legal difficulties would come if broadcasters are moved and find they don’t have a “substantially similar signal contour” and as a result lose audience, McDowell said. “There are a lot of moving parts here where a broadcaster may lose his or her audience or part of the audience. That could constitute irreparable harm,” and that is one of the things courts look at in issuing injunctions, he said. “Injunctions are still extremely hard to get. I'm not predicting that will happen, but we don’t know.”

McDowell also warned that the FCC proposal to hold a reverse auction for broadcasters and forward auction for carriers makes the success of the auction less certain. “I've been told by many broadcasters and some economists advising them that the notion of a simultaneous reverse and forward auction is confusing and opaque, and breeds uncertainty and uncertainty means that people are less likely to be sellers,” he said.

Furchtgott-Roth asked how broadcasters would be protected under a simultaneous auction. “Well, there’s going to be this government-created software that’s going to take care of that,” McDowell replied, to some laughter from the audience. “I hear a voice of skepticism in the audience,” Furchtgott-Roth continued. “It’s going to be fine, don’t worry about it,” McDowell said to more laughter. “I'm being facetious. I have no idea if it'll be fine. We hope and pray that it will be fine. I want it to be fine. … After each round there’s software to determine the repacking. I'm not making this up.”

McDowell said he’s not “optimistic” the auction “will be a smashing success,” though he said he hopes he is wrong about that. The FCC needs to keep things simple, he said. “Don’t try to show how smart you are by making it overly complex, because that’s going to have unintended consequences.” McDowell predicted the auction will mean less spectrum in the hands of carriers than has been predicted. It will be “well South” of 120 MHz, he said. “It won’t be 120 merely because they forgot about Canada and Mexico.”

McDowell, who has long cautioned that a 2014 auction is unlikely, said the length of time it will take the Senate to confirm new commissioners could guarantee delays. “It could be the fourth quarter before we see the new chairman and another commissioner installed,” McDowell said. “With the background check phase and the pairing of the Republican and the Democrat for nomination and confirmation purposes, coupled with the political climate … it doesn’t bode well for any sort of speedy confirmation process.” McDowell said a “trifecta of scandals,” the IRS’s targeting of conservative groups, the killings of U.S. diplomatic personnel in Benghazi and the Justice Department’s probe of reporter phone records, could mean senators put holds on nominees until various documents are released on investigation of the scandals. “That could go on for a long time,” he said. “Late fourth quarter could be optimistic even before you get a new chair."

"I think the team working on the incentive auction is aware of these concerns that have been raised by a number of other parties, but the proceeding in a way has been in a bit of suspended animation,” McDowell told us after his remarks. Uncertainty will likely remain until after Wheeler and a new Republican commissioner are confirmed, McDowell said. “I'm hopeful the commission can create auction rules that would avoid being set aside by a court, but all stakeholders need to consider that as a somewhat elevated possibility."

McDowell told us the 600 MHz band plan public notice released May 17 may prove helpful in the long run. The notice was a dominant topic of discussions at CTIA the following week (CD May 24 p3). “I think the saving grace of the PN is that a diverse group of interests expressed their distaste for many of the ideas expressed in it and such uniform disagreement actually can end up being a unifying force,” he said.

Public Knowledge Senior Vice President Harold Feld said the concerns McDowell raised about the auction being challenged in court may well be on target. “The statute creates a set of protections for broadcasters who do not chose to sell back all their spectrum rights,” Feld said. “Those protections translate into many millions of dollars for broadcasters, and anyone who feels they got a bad result in the repacking is likely to challenge it in court. It is not clear what impact that will have for the auction as a whole, however. Courts are reluctant to try to ‘unscramble the egg,’ and I think are unlikely to impose a solution that would undo the auction once it has taken place."

"Our coalition is optimistic that the auction will succeed, that we'll transfer 120 MHz of spectrum and raise the money for FirstNet,” said Preston Padden, executive director of the Expanding Opportunities for Broadcasters Coalition, reacting to McDowell’s remarks. “There is no question that there are big challenges here, but if the commission keeps it simple and keeps it grounded in the real world instead of the rarified Stanford economic atmosphere this auction can succeed.” Stanford economists are playing a key role in designing the game theory underlying the auction, FCC officials have said.

McDowell holds out little hope the divided Congress will take on Telecom Act reform, though at some point a rewrite “absolutely has to be done,” he said at the event. “There’s also got to be a driving need among many stakeholders interested, and I'm not sure I've seen the big push by some of the stakeholders who could actually start to get legislation moving.” Senate Commerce Committee Chairman Jay Rockefeller, D-W.Va., is retiring at the end of the Congress, noted McDowell. “That tells me that he’s less likely to push a comprehensive rewrite through,” McDowell said. “I think we can write off the next year and a half. … I wouldn’t look for anything meaningful happening for a minimum of about four years."

McDowell also remains concerned about international attempts to regulate the Internet, as exemplified by December’s World Conference on International Telecommunications. The U.S. declined there to sign on to revised International Telecommunication Regulations (CD Dec 14 p1). “Overall, the thrust thus far is in the wrong direction,” said McDowell. “For decades, the consensus was internationally that governments should keep their hands off this space, the markets that became known as the Internet net sector. But over the years there were a lot of countries … who have been quietly and persistently trying to change that for a variety of motivations.” Using an “incremental approach” to gain more control, “they're winning as we saw in Dubai” at the WCIT, McDowell said. The U.S. was assured prior to the WCIT treaty that negotiations “would not touch the Internet” and “there would be unanimous consensus … none of which turned out to be true,” he said. Forty percent of nations that attended WCIT haven’t signed the treaty, he noted. “It was a debacle and it has created a tremendous amount of uncertainty."

The next big international conference to watch is the ITU Plenipotentiary meeting, scheduled for October of 2014 in Busan, South Korea, McDowell said. “There will be essentially a constitutional convention convened of the ITU, where they will literally rewrite their constitution and they will elect a new secretary general.” The leading candidate now is Deputy General Secretary Houlin Zhao from China, said McDowell. Zhao is “very charismatic, but China is one of the countries pushing the hardest for some of these regulations,” McDowell said. “One of the Holy Grails for China in terms of Internet governance is to have an international registry, and I'm not making this up, of all IP addresses, so that’s every device you've got with you right now and ultimately your refrigerator and car will have IP addresses.”