A newly constituted Federal Communications Commission soon will get a chance to reconsider one of the thornier issues facing the agency in recent months. That is, how to deal with the personal communications services spectrum auctions where many of the biggest winners look likely to default. In coming up with its own answers, the new FCC should learn from past mistakes and improve the system while recommitting to the fundamental consumer gains achieved by auctions.
The PCS auctions provide a foil for understanding what went right and wrong with spectrum auctions and why. The A- and B-block licenses raised roughly $8 billion for the U.S. Treasury. The C-block, which was reserved for small businesses and adorned with highly favorable installment terms, went for another $10 billion. That auction success story turned to failure when the biggest holders of the C-block licenses appeared likely to default. Last September, the FCC decided to give these C-block licensees additional payment and re-auction options, but some large holders already have decided to take their chances in bankruptcy court.
Regardless of what happens with the C-block licenses, it is crucial to recognize that the consumer benefits of the PCS auctions are far more important than the Treasury revenues they generate. The auction architects were right-auctions assigned licenses far more efficiently than the old alternatives of administrative hearings and lotteries, which combined decades-long delay with arbitrariness and fostered industrial planning by the FCC. Auctions caused the FCC to make more spectrum available for more new services in a shorter time than ever before. Under the old regime, established firms were able to game the system to delay creation of new services requiring spectrum. Ironically, the revenue-raising capabilities of auctions that became the exclusive focus of public attention also created effective political pressure to get more spectrum into the marketplace.
The auction system also led the FCC to give licensees more leeway in deciding how they would offer these new services. Under auctions, businesses that were paying millions for their licenses were entrusted with more freedom to aggregate spectrum across markets, to pick the specific type of service they wanted to offer and to decide which technology they would use. Previously, when the FCC was bestowing licenses for nothing, it often succumbed to the temptation of extracting compensation by requiring firms to meet bureaucratically set goals. The dangers of this regulatory “quid pro quo” in the absence of auctions can be seen in the recent furor over whether broadcasters must use their new digital TV channel for one “high definition” television channel or multiple, somewhat lower quality digital signals. If broadcasters were paying for the use of these channels, the government would not be telling them how many “pixels” their new digital pictures must contain.
But because broadcasters were able to avoid payment by promising free over-the-air HDTV, even normally straight-thinking politicians have been disposed to plan picture quality for the broadcasting industry.
The critics of the PCS auctions should focus their scorn on the real source of the problem-the highly favorable installment terms offered to small business bidders. By granting these terms, the FCC became a $10 billion creditor, but unlike other investors it never once scrutinized a management team or business plan. If small business bidders had instead been given a bidding credit and forced to compete against other bidders, the resulting mess need not have occurred. All winners would have been required to pay before getting their license, and bidders and investors would have had to face the reality of coming up with money (even where reduced by a bidding credit) shortly after the close of the auction.
My point? The problem was not with auctions, but with too generous installment payments offered to promote small-business entry. By resolving never again to offer bidders significant installment terms, the FCC can go a long way toward protecting the integrity of future auctions.
What can the FCC do to make the best of the current situation? Should it consider changing its rules after the fact? Like it or not, once the FCC chose the installment payment route for the C block, it may have afforded winning bidders legal rights under bankruptcy law. In practice, the agency’s position may be limited to what it can reasonably expect to win in bankruptcy court. Such proceedings take a long time and often end in negotiated settlements. Now the FCC must fashion a deal that is fair to all parties and gets the spectrum back for a quick re-auction. The best solution would be to give the licensees amnesty on their debt and allow them to participate in the new auction, if they return their licenses. Also, they must forfeit a significant portion of their down payment. The forfeiture should be set on the basis of bankruptcy precedent. As long as the deal is slightly better than what they can expect to get in bankruptcy, the licensees should take it.
In solving this immediate problem, both the FCC and Congress should not lose sight of the larger consumer benefits achieved by spectrum auctions. If the newly constituted FCC focuses on creating more services for consumers, it can avoid problems in future auctions at the same time it commits itself to moving additional spectrum into the market and giving spectrum licensees even greater flexibility.
Peter Pitsch is a telecom attorney and adjunct fellow at the Hudson Institute. He was a senior staff member at the FCC from 1981-1989.
