Spectrum Provisions in the Middle Class Tax Relief Act

When President Barack Obama signed the Middle Class Tax Relief and Job Creation Act of 2012 into law on February 22, 2012, the Federal Communications Commission (FCC) gained authority to 1) hold voluntary incentive auctions and 2) allocate necessary spectrum for a nationwide interoperable broadband network for first responders. The new law also provides A) $7 billion for public safety broadband network build out, and B) up to $1.75 billion for relocation costs for broadcasters. According to the Congressional Budget Office, the spectrum auction will raise $15 billion over the next eleven years.

Specifically, the bill would establish clearing and auction timelines for spectrum in 1915-1920 MHz and 1995-2000 MHz (the PCS H Block), 2155-2180 MHz (the AWS-3 block), 1755-1780 MHz, 15 MHz from the government spectrum at 1675-1710 MHz paired with 15 MHz to be determined by the FCC. The bill would also allow the President to substitute alternate spectrum for 1755-1780 MHz and would reallocate the 700 MHz D Block from commercial to public safety use.

A Nationwide Interoperable Broadband Communications Network for First Responders
Creating a nationwide interoperable broadband communications network for first responders will deliver on one of the last outstanding recommendations of the 9/11 Commission. For more than a decade, public safety advocates had been seeking federal approval for a high-speed wireless system that connects police and firefighters across multiple jurisdictions. Thanks to the legislation, the reallocation of D Block means that public safety will have 20 MHz of contiguous spectrum to launch the nationwide wireless broadband network. In addition, public safety also won’t be required to return its 700 MHz narrowband spectrum.

The Government Accountability Office this week reported to Congress that there are several challenges to implementing a public safety broadband network, including ensuring the network’s interoperability, reliability, and security; obtaining adequate funds to build and maintain it; and creating a governance structure. The price of handheld land mobile radio (LMR) devices is high—often thousands of dollars—in part because market competition is limited and manufacturing costs are high. Further, GAO found that public safety agencies cannot exert buying power in relationship to device manufacturers, which may result in the agencies overpaying for LMR devices. In particular, because public safety agencies contract for LMR devices independently from one another, they are not in a strong position to negotiate lower prices and forego the quantity discounts that accompany larger orders. For similar situations, GAO has recommended joint procurement as a cost saving measure because it allows agencies requiring similar products to combine their purchase power and lower their procurement costs. Given that Department of Homeland Security has experience in emergency communications and relationships with public safety agencies, it is well-suited to facilitate joint procurement of handheld LMR devices. The DHS should work with partners, GAO recommended, to identify and communicate opportunities for joint procurement of public safety LMR devices.

On February 21, Vice President Biden met with first responders to thank them for their service and to discuss the new nationwide public safety broadband network included in the Payroll Tax Extension legislation. In addition, he announced the release of a new report from the Council of Economic Advisers (CEA), The Economic Benefits of New Spectrum for Wireless Broadband, describing the substantial economic value of aggressively pursuing President Obama’s goal of nearly doubling the amount of spectrum available for wireless broadband over ten years and deploying a nationwide interoperable wireless network for public safety.

The report summarizes the compelling evidence that additional spectrum for wireless broadband is needed to accommodate the surging demand for wireless data traffic, projected to increase by a factor of twenty between 2010 and 2015. The report also describes the potential for wireless broadband to play a transformative role in public safety and as a platform for innovation in many areas of the economy, and documents the substantial impact on jobs, growth, and investment that the growth of wireless broadband will have.

Specifically, the report reaches the following conclusions:

  • The use of voluntary incentive auctions will ensure that spectrum is reassigned from the lowest value uses to the highest, and that the economic benefits are widely shared among stakeholders, including broadcasters, wireless carriers, consumers, and taxpayers. The recently passed spectrum bill gives the FCC authority to conduct these auctions.
  • Unlicensed spectrum is a valuable complement to licensed spectrum, and allocating new spectrum for a mix of licensed and unlicensed uses will offer the most fertile environment for future innovation. The spectrum bill gives the FCC authority to allocate more spectrum for unlicensed uses, creating new opportunities for the development of innovative wireless technologies.
  • Federal funding for research and development in emerging wireless technologies will have substantial public benefits, particularly to support the development of innovative technologies for use in public safety. The bill sets aside $100-300 Million for public safety network R&D, funds that will be vital to helping the public safety community build a new robust, flexible and innovative network for first responders all around the country.

Spectrum Auctions
Of course, the question now is – Will television broadcasters be willing to sell off some of the spectrum they are currently using? Even though the potential cut for broadcasters from the sale is $1.75 billion, there doesn't seem to be a whole lot of excitement about the idea. Broadcasters "have leverage and if the price isn't right ... most everything falls flat on its face," said Jeffrey Silva, a senior policy director with Medley Global Advisors.

The National Journal’s Juliana Gruenwald noted the pressure the FCC is under now to fashion the spectrum auctions in a way that generate the most revenue possible given that the proceeds have been slated to pay for a variety of proposals. The legislation calls for two types of auctions. The first are called “reverse auctions” which would allow broadcasters to bid on what it would take for them to give up their spectrum. Broadcasters have three ways they could participate in reverse auctions: give up their spectrum and stop broadcasting; give up their spectrum and share a frequency with another broadcaster; or give up their more valuable UHF spectrum and move to a VHF channel, which is less suitable for today’s digital broadcasting. At least two broadcasters must participate in order for a reverse auction to take place in that market.

The FCC will also fashion what’s being called “forward” auctions in which wireless companies can bid on the spectrum that comes available from broadcasters. The legislation prohibits the FCC from barring eligible wireless firms from bidding, but it leaves open the door for the FCC to launch a rulemaking that could limit the amount of spectrum a wireless carrier could hold in each market.

Chris Guttman-McCabe, vice president for regulatory affairs for the wireless industry group CTIA, said he expects the FCC will likely do the reverse auctions first and then follow with forward auctions of that spectrum. The FCC will likely set minimum bids for wireless operators to cover the amount that has to go back to broadcasters, he added.

Philip Weiser, dean of the University of Colorado Law School and a former telecommunications advisor for the Obama administration, said he expects smaller broadcasters to try to have their cake and eat it too by sharing spectrum. For example, one TV station could sell its spectrum and then partner with another station and share airwaves. Although that would not appeal to a big broadcaster, smaller mom-and-pop TV stations might be more willing to embrace such an option. “It is a huge opportunity for them,” said Weiser, adding that such a practice would allow for a more efficient use of spectrum and would give broadcasters who choose to sell a “hefty profit.”

These incentive auctions will have a huge impact on the wireless industry as the carriers with the biggest batches of high-quality spectrum have more bandwidth to satisfy customers' growing demands for mobile phone calls, texts and Internet usage. That means fewer dropped calls and faster download speeds. "Wireless operators have to decide whether they spend money acquiring new spectrum or building tens of thousands of new cell sites all over the country," says Dan Hays, a partner at PricewaterhouseCoopers' consultancy. "That's the big dilemma." Both of those options cost billions. There's a third choice: consolidate. By merging, carriers can gain access to both spectrum and more cell sites. That can also cost billions, but it's a turn-key solution. The problem is that regulators hate it.

There are only two commercial holders left of big spectrum chunks: The Dish Network and LightSquared. But LightSquared’s spectrum is only licensed for satellite services, not the terrestrial transmissions needed to carry wireless phone signals. LightSquared is currently caught in -- and losing -- a high-stakes regulatory fight over the issue. That leaves Dish. The company has considered building its own wireless network, perhaps by snapping up Sprint or Clearwire, but the costs of doing that are scary. Some analysts think Dish will take the plunge, while others predict that it will go the safe route and sell off its holdings. Either way, it's got vultures circling.

The new law also requires the FCC to determine whether it is feasible for unlicensed technologies such as Wi-Fi to operate in a few identified bands including "guard bands" in between the swaths of spectrum that would be auctioned to wireless carriers and in a chunk of spectrum set aside for "dedicated short-range communications." The FCC created the white spaces between channels decades ago to prevent stations from interfering with each other. The new law opens up the white space channels for “unlicensed” use. Unlike the spectrum controlled by carriers such as AT&T and Verizon Wireless, which is reserved for specified companies, unlicensed bandwidth is open to any user with an approved device. Wi-Fi, microwave ovens, baby monitors, and cordless phones all use frequencies that the industry calls the “junk band.” These radio waves can’t easily penetrate walls and are hard to maintain over long distances. The TV frequencies where the white space is located, by contrast, carry long distances and remain strong even inside buildings. Since rural areas have fewer TV stations, opening up white space could prove a boon to rural wireless Internet providers, which have struggled to provide service using a more robust version of Wi-Fi.

Spectrum Boondoggle?
Although most would call the spectrum provisions in the Payroll Tax Cut Extension an overall “win” (see The Final Score on Spectrum Legislation: Bad Stuff Averted, Good Stuff Made Possible. I Call That A Win.), the deal has critics, too. Writing in the Huffington Post, J.H. Snider calls the incentive auctions a “giveaway of public spectrum assets worth over $200 billion, which would make it the largest corporate welfare program in history.” Congress, Snider notes, grants the FCC authority to authorize incentive auctions even if the net receipts to the Treasury are negative. He writes:

“Members of Congress don't mention that broadcast licensed spectrum can be transitioned to flexible use regardless of licensee participation in an incentive auction. They don't mention that during this transition the FCC is given incentives to allow broadcast licensees at taxpayer expense to shift to more valuable spectrum and expand their geographic service areas. And they don't mention the recent transition from analog to digital TV, heavily subsidized by the public, including the purchase of hundreds of millions of new DTV sets containing Congressionally-mandated over-the-air broadcast TV receivers that are now to become obsolete in the same way that the pre-transition analog TV sets became obsolete.”

The latest developments in the spectrum auction debate is just one of three big stories we tracked this week. We’ll see you soon with more on the Verizon-SpectrumCo transaction and the White House privacy announcement. Here’s a quick look at next week’s agenda. We’ll see you in the Headlines.