Incentive Auction Update: Add PEA to the Alphabet Soup Options for the 600 MHz Band

EA or CMA or MSA/RSA or CMA or . . . how about PEA? 

One of the crucial questions that the FCC must answer before it can get its Incentive Spectrum Auction off the ground is how it plans to sell 600 MHz licenses in the “forward” part of the auction.  In the Incentive Auction Notice of Proposed Rulemaking, the Commission indicated that it was initially leaning toward selling them based on Economic Areas (EAs), rather than larger pieces of real estate (e.g., nationwide licenses) or smaller alternatives (e.g., CEAs or MSA/RSAs).  (Fuzzy on the distinctions?  Check out the Blogmeister’s Sidebar at the end of this post for further information.)

But now the Wireless Telecommunications Bureau, at the prodding of the Competitive Carriers Association (CCA), is thinking that Partial Economic Areas (PEAs) might be the way to go, and it’s asking for input on the question.

This is a big deal.  Here’s why.

As most readers presumably know, the Incentive Auction will consist of two independent but interrelated elements: (1) the reverse auction, through which the FCC will “free up” spectrum by giving TV licensees cash to vacate their current channels; and (2) the forward auction, in which the FCC will sell off the spectrum freed up in the reverse auction.  (The cash generated by the latter will be used in part to pay broadcasters in the former.) The ultimate success or failure of the Incentive Auction will be measured in part by how much money the forward auction brings in.

That being the case, the FCC has to be concerned about how to market the spectrum for the forward auction.  Selling nationwide licenses, for example, might seem a simple way to attract the highest bids from the get-go, but there are problems with that approach.  For example, the amount of spectrum that might be available for easy nationwide use could be limited, since the “freeing-up” process of the reverse auction and consequent spectrum repacking may not yield uniform amounts of spectrum in all markets. 

Offering spectrum on a more granular, less-than-nationwide, basis necessarily raises the question of what geographic or other units to use for bundling the spectrum for auction.  Using units that are too small would risk complications in auction design and implementation, as well as in the service roll-out.

After grappling with these difficult questions, the Commission (as noted above) initially liked EAs.  But along with other commenters, CCA (representing more than 100 competitive wireless carriers, including rural, regional and national carriers) preferred CMAs.  CMAs are smaller than EAs, better suited to the coverage of small and rural operators. And as a practical matter, such operators might not be able to afford to successfully bid on EAs, much less fully deploy an EA-wide system.  So they would have an easier time if the spectrum increments were put up for auction on a CMA basis.

But CMAs don’t “nest” into EAs, which may or may not be a problem.  As an alternative, CCA has proposed that spectrum be auctioned in PEA blocks, which neatly subdivide EAs.  In CCA’s view, the smaller size of PEAs would “enable smaller and rural carriers to bid on portions of EAs to obtain more efficiently sized spectrum licenses”.

The question of what spectrum increment(s) to use in the auction is by no means trivial.  Think of it in terms of haves vs. have-nots.  The existing nationwide operators – primarily AT&T and Verizon – presumably have their eyes on acquiring as much spectrum as possible, and they have deep enough pockets to bid on large increments.  Smaller carriers – such as the rural and regional folks represented by CCA – have far less interest in snagging spectrum outside their respective bailiwicks, and their more limited financial resources probably wouldn’t let them compete against AT&T and Verizon in a bidding war for larger spectrum increments. 

This dichotomy is tugging the Commission in two directions:  on the one hand, the deep pockets of AT&T and Verizon make it tempting to maximize revenues by selling the spectrum in big chunks; on the other, the “big chunk” approach would substantially reduce the ability of smaller rural operators to compete in the auction.  One theory suggests that the more bidders participating, the greater the chances of maximizing bid amounts across the board.  Congress is interested because it is relying on auction revenues to help with the federal budgeting.

So the PEA proposal could be just what the doctor ordered to bridge the gap by providing a “Goldilocks” alternative right between EAs and CMAs.  As it turns out, there are 176 EAs nationwide; there would be more than 700 CMAs; and right in the middle are PEAs, numbering 350, according to the FCC’s public notice.

The Wireless Bureau is also soliciting comments on whether – and if so, how – PEAs might be “packaged” into increments consisting of several PEAs.  That would permit the larger operators to avoid having to fight a maximum number of separate auction battles.  Not surprisingly, CCA and smaller carriers aren’t keen on the whole packaging concept.  CCA has suggested that, if PEA package bidding is to be permitted, a per-package cap (“no more than the ten largest PEAs by population”) per bidder should be imposed.  AT&T, by contrast, has advocated for nationwide packages, or at least packages consisting of the top 100 markets.

As arcane as all this may seem, resolution of these questions could have a major impact on the outcome of the Incentive Auction.  The deadline for comments is January 9, 2014;  reply comments may be filed by January 23.

[Blogmeister’s Sidebar – For those readers unfamiliar with the FCC’s alphabet soup, here is some background on EAs, CMAs and PEAs.

EA:  Economic Area.  As defined by the Bureau of Economic Analysis, EAs are “one or more economic nodes – metropolitan areas or similar areas that serve as centers of economic activity – and the surrounding counties that are economically related to the nodes”. EAs can be aggregated to form larger areas, such as Major Economic Areas (MEAs) and Regional Economic Area Groupings (REAGs).  There are 176 EAs nationwide.

CMA:  Cellular Market Area.  CMAs are standard geographic areas used for licensing cellular systems; they consist of Metropolitan Statistical Areas (MSAs) (defined by OMB) and Rural Service Areas (RSAs) (defined by the FCC).  There would be more than 700 CMAs nationwide.

PEA:  Partial Economic Area.  PEAs are subdivisions of EAs based on the CMA boundaries; they are smaller than EAs and they separate rural from urban markets to a greater degree than EAs.  CCA contemplates 350 PEAs nationwide.]

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