NEWS

June 18, 1997

In remarks today to Citizens for a Sound Economy, FCC Chairman Reed Hundt praised some elements of the House and Senate Commerce Committee mark-ups of the budget reconciliation bill. Hundt also identified what could be several "bad ideas on the march" in Congressional debate.

Hundt identified the following problems in pending spectrum legislation:

• The House spectrum bill would reverse the FCC's decision to provide public safety and commercial users with new channels in recovered TV spectrum. Hundt warned this would have the disastrous effect of preventing the nation's police and fire departments from obtaining the new frequencies they desperately need to protect our communities.

• Taken together, the House and Senate measures could convert what was to be a loan of new Digital Television (DTV) licenses into a permanent gift by undercutting broadcasters' obligation to use the DTV licenses and to return their analog licenses. Hundt noted that the House measure effectively hamstrings the FCC's order that broadcasters return the analog licenses, while the Senate, over the objections of Senator McCain, would try to undercut any DTV build-out requirement.

• The House bill could effectively eliminate the FCC's ability to hold auctions. Hundt asserted that imposing minimum bid requirements threatens to undermine auctions by creating uncertainty that would inhibit auction participation and impede capital formation. He added that eliminating the FCC's ability to fund its auctions program from auction receipts could stop dead the Commission's entire auction schedule.

• Both House and Senate measures failed to adopt the Office of Management and Budget's proposal giving the FCC authority to recover and reauction licenses held by bankrupt licensees. Hundt noted that the House never included this authority in its bill while the Senate deleted the Administration's proposal creating it for the Commission.

• The Senate bill would undermine the FCC's ability to afford licensees the flexibility to rely on market forces to best determine the nature of their service offerings and the technology they use to respond to competitive pressures in the marketplace.

Hundt observed that the FCC's 14 spectrum auctions to date have resulted in the issuance of 4,377 new licenses and collected $11.7 billion for the Treasury. He also cited evidence showing how eliminating spectrum scarcity has resulted in price reductions of up to 25% in mobile telephony, unprecedented wireless investment, and the introduction of innovative new services.

Introduction

Thank you for inviting me to speak here today. I want to especially recognize and thank James Gattuso for his thoughtful contributions to the public debate about spectrum policy and auctions over the last five years.

I am delighted to be speaking at this event organized by Citizens for a Sound Economy.

I believe we share many fundamental values. For instance, I think of CSE as really standing for Citizens for Sound Economics or Citizens for Smart Economists. Economists may consider that a redundancy. Possibly they're correct. In any event, we need them and we need you.

FCC should stand for Fostering Competition in Communications. Sound economics should be part of every dimension of our work. That's why I was glad to see the President nominate a PhD Economist to be an FCC Commissioner. No one can remember that happening before. It's about time.

You may remember that our motto from the day I arrived was "Read the Law/Study the Economics/Do The Right Thing."

So we tripled the number of economists, brought in a trio of first rate Chief Economists (Mike Katz, Joe Farrell and Mike Riordan) and literally reinvented the economic analysis of the agency. Congress and the Administration also granted us authority to use auctions to award new licenses. As a result, for the first time ever the FCC truly follows a market-based approach to the allocation and use of spectrum.

I'm not the economist behind these ideas. I've cross examined and hired economists. I respect them. And I rely on them.

I embraced their ideas and their discipline when I first got this job because sound economics is the way to create the deregulatory, pro-competitive marketplace that we all want and that Congress asked for when it passed the 1996 Telecommunications Reform Act.

I'd like to talk today about our country's new, de-regulatory, market-based policies regarding the use of spectrum, and especially our spectrum auction program.

In particular, I'd like to talk about the extraordinary threat to these policies. These policies work for the country. But in Washington many adhere to the view: If it ain't broke, let's fix it. This is particularly true for spectrum issues. For decades Congress and the FCC have managed spectrum uses to limit competition, to improve the engineering judgments of the private sector and to grant benefits to special pleaders. Now there is a recidivist impulse to manage spectrum. This is a predictable response to our new regime of rapid, efficient licensing through auctions and market-reliant, flexible use. Now our auctions program is being jeopardized by many of the provisions under consideration in the Budget Reconciliation process.

Now all is fair in love and war and congressional debate. So I hope my friends and mentors on the Hill won't mind if I throw in my two cents concerning the events of this week in the House and Senate Commerce Committee.

We all know what the lobbying is like during mark-ups. The worst ideas are argued with passionate intensity; the best ideas lack advocates with conviction. Citizens can scarcely see what is transpiring as many forces of darkness lobby against few beacons of light, and gloom, smoke, and fog spread through the rooms.

Yet it appears that at least the following is true: the House and the Senate Commerce Committees, over the objections of at least Congressman Markey and Senator McCain, went a long way toward making sure that broadcasters receive another billion dollar handout of public property, on top of the digital TV giveaway of last year.

CSE has been, or is being, disappointed again.

You remember the giveaway of digital TV licenses to today's broadcasters. It was the largest single grant of public property to anyone in the private sector in this century. You and Senator McCain and Bill Safire and the editorial boards of virtually every major newspaper in the country said that this was awful, and that the licenses should have been auctioned.

Yet others asserted it was not gift, but merely a loan, because broadcasters would build digital TV towers and promote digital TV and then return the analog licenses.

So, denied the authority to auction DTV licenses, that's what the FCC ordered in April. When we get back the analog licenses, we noted, the country would not only receive all that analog spectrum (perhaps the most precious public property in this country), but due to a wondrous engineering feat called "repacking", we would free 78 megahertz of spectrum for other uses; a couple years ago we sold 60 megahertz for $7.7 billion. That gives you a feel of the size for the taxpayer benefit if broadcasters really give back the analog licenses.

Then this week the House Commerce Committee undercut the obligation of the broadcasters to give back the licenses and the Senate Commerce Committee undercut the duty of the broadcasters even to build DTV towers.

If the law takes these two bad turns, a result that would be! Give the DTV licenses to broadcasters so no competitors could get them; tell broadcasters they don't really have to build the dtv systems; and then tell broadcasters their reward for not using this incredibly valuable public property is that they never have to give back the analog licenses.

In return for what? No specific, quantifiable, reliable public interest commitments have been made; no free time has been extended to reform political debate; no payment to the Treasury by fee or auction revenue has been promised; no new wireless industry has been promoted.

But the good ideas and policy heros need your help and support, and in a hurry.

Plus other bad ideas are on the march.

Some want the FCC not to use auction revenue to conduct auctions. Because we have no appropriations money for conducting auctions, this idea would kill auctions.

Some want to frustrate new public safety uses of spectrum.

Some want the FCC to key auctions to budget targets, so that if a large percentage of CBO auction revenue estimates are not achieved, we cancel the auction. This defeats all the auction goals of trusting markets, promoting efficiencies, and distribution licenses quickly.

Some want to undercut our policy of permitting flexible use of spectrum. Some want us to let license be tied up in Chapter 11 proceedings for years, thereby frustrating their commercial use.

Fortunately the fight for the right ain't over yet. Senator Hollings and Senator Stevens saved the Comission's auction program by ensuring that we could continue to fund it out of revenues. Senators McCain, Dorgan, and Kerry made many right points in the Senate Committee debate and Congressman Markey had a great idea -- that all TV's after a certain date should have digital and analog capability to facilitate the transition -- in the House Committee debate. The smoke is still clearing, so I can't identify all the policy heroes at this time, but I'm sure there are others.

So I'm here to say that billions of dollars in growth and hundreds of thousands of jobs are at stake. Let's hope that Congress orders us to continue auctions to award all licenses as efficiently as possible. Let's hope that auctions not be delayed or used to fit arbitrary budget goals. Let's let licenses be issued like tickets to compete when the correct number to be issued is this: as many as the market can sustain.

In the last three years, we've run 14 auctions, issued 4,377 licenses, and collected over $11.7 billion.

With each auction, we learn something new. We've tried new techniques, such as simultaneous, multiple round auctions, and sequential multiple round.

We occasionally ask Congress to grant us additional authority such as the power to take back licenses and reauction them when a licensee is in bankruptcy. The Senate Commerce Committee deleted this provision from the OMB draft.

But fundamentally, auctions are the most free-market, successful program ever designed to promote competition in communications.

The debates about auctions, like all debates about spectrum policy since the 1920s revisit a fundamental question: should spectrum be treated as public property to be used according to government rule, or should spectrum be treated as private property with minimal government intervention?

On the one hand, usable radio spectrum is finite and it is highly desirable to guarantee that some of its uses serve public purposes.

On the other hand, maximizing economic benefits from spectrum use requires extensive reliance on the same market-based forces that lead to optimal use of private property. The lessons we have learned over the 70 years since the Federal Radio Commission was created have led to a "third way" that delivers public benefits from this key resource of the information age, but deregulates and relies on private market mechanisms to develop that resource for the good of the economy.

We have had two overriding goals during my tenure at the FCC: to increase competition in communications and to ensure that all Americans share in the benefits of the communications revolution.

Our New Spectrum Policy embraces all airwave licenses and has four basic principles:

Competition, not monopoly, in all uses of the airwaves;

Flexible use of the airwaves for commercial purposes;

Clearly defined guidelines for all uses of the airwaves that are not strictly commercial (i.e. public interest uses);

The award of licenses through competitive, quantifiable, open and fair processes.

Our philosophy relies on markets to allocate goods efficiently and to produce innovation, consumer choice, lower prices and better services. Surely most economists would agree with this. Where markets fail, specific, quantifiable public interest obligations should be placed on licensees in a competitive neutral way.

If we license sufficient quantities of spectrum, markets will cause spectrum to be used in ways that best serve consumers. Markets will stimulate competition, innovation and promote spectrum efficiency. Government-created spectrum scarcity serves only to block these forces.

For example, for over 10 years, government entry barriers limited to two the number of companies that could hold a license to provide fully mobile telephone service. Even worse, one of the two licenses was given to an incumbent telephone company which had no incentive to use the license to provide a competitive service. These catastrophic, but redeemable mistakes led to a duopoly market structure in cellular telephony, that kept competition down, delayed digital development, and kept usage low and prices up.

In the last 3 years we reversed years of Commission policy and adopted a marketbased approach. The FCC released new spectrum for mobile telephony to compete with the incumbent cellular operators, promoted competition by adopting spectrum caps that prevented this new spectrum from being captured by the incumbents and repeatedly voted for flexible use.

The evidence is overwhelming that eliminating artificial spectrum scarcity has clearly benefitted the public. According to a recent study by The Yankee Group, competition (and the prospect of future competition) has already sparked price reductions of up to 25 percent in mobile telephony.

And the new PCS entrants have introduced innovative new services that were never before offered with mobile phones. Wireless investment has increased more than 250% since 1993 and over the next ten years will total more than $50 billion. It is the largest single investment in a new, non-military technology in American history.

The new spectrum policy represents a significant change in policy. It means among other things, that some holders of licenses, of tickets to ride the information highway, will crash and burn in the fast lanes of competition. And we should be willing to tolerate such results.

But the new paradigm should allow new entrants to succeed or fail based on their business plans and their ability to attract customers, not because of the weight of their debt burden. This means we should offer to restructure the debt of licensees who still owe the government money for their licenses -- because that's what any commercial lender would do -- but our offer should be no less than the current dollar value of the licenses. If the licensees in financial trouble can't pay this amount we should foreclose. Further, Congress should give us authority to reclaim and reauction the licenses that are held by licensees in bankruptcy. We don't guarantee success -- only the opportunity to compete; if licensees in financial trouble can't accept our market-based terms, we should let them transfer the licenses, or take them back, and reauction them promptly.

The engine of this revolution in spectrum management has been our auction program.

From the 30's through the 70's, the Commission used a byzantine comparative hearing process to award licenses. Obtaining a license through comparative hearings was a painful, protracted, lawyer-intensive, largely subjective process that usually took years and rarely withstood scrutiny.

In the 1980s, Congress authorized the FCC to use lotteries to award licenses, but lotteries only fueled speculation and allowed for windfalls for the lucky winners, who in most cases conducted their own private auctions after obtaining the licenses.

Auctions are superior in every way to all other forms of licensing. Using our unique auction methodology, we grant new spectrum licenses in months, not years. New technologies and services are deployed much more rapidly. The public is better served both from the increase in marketplace competition and from obtaining value for granting the right to use the spectrum.

In a May 1997 paper by the Hudson Institute, titled "Wireless Services, Spectrum Auctions, and Competition in Modern Telecommunications," Tom Duesterberg and Peter Pitsch recognize that the innovative market-based auction methods developed by the FCC facilitated "getting new technologies to the market more quickly, promoting the deployment of efficient nationwide and regional networks and bringing new entrants into the wireless market for PCS services".

In three years we've had 14 auctions. We've issued 4,377 licenses pursuant to auctions. We've examined dozens of spectrum bands for the possibility of more auctions. I've asked Wireless Telecommunications Bureau to examine all bands for auction possibility and asked them to report to me on the results by not later than August 1. I beseech you to insist that this task be completed.

The Commission could not have accomplished what it has in bringing new wireless services like PCS to the marketplace quickly without the statutory authorization to use auctions. I'd like to outline the essential elements for our continued success with spectrum auctions, and then talk about some concerns I have about some provisions in the pending bills that are threaten to kill the auction program.

Any new legislation extending the FCC's auction authority should embrace five principles.

First, with only limited exceptions for spectrum used by public safety agencies, and where international allocations are involved, auctions should be used for allocating all spectrum.

Second, Congress should not mandate a particular timetable for auctioning new spectrum licenses. The limited number of bidders in the recent Wireless Communications Service auction proves that prospective bidders need time to develop their business plans and arrange financing. We should not establish artificial delays -- to the contrary, spectrum should be assigned as quickly as possible -- but the FCC should be permitted to afford adequate time for prospective bidders, equipment manufacturers and investors to assess the marketplace potential of new spectrum opportunities. Congress should not -- as it did for WCS -- mandate the beginning and ending date of the auction.

Third, Congress got it right in the 1993 Budget Reconciliation Act -- maximizing auction revenues should not be considered in making spectrum policy. In none of our 14 auctions have revenue predictions proved accurate. The WCS auction would not have been regarded as a bust if it had been scored for $10 million rather than $1.8 billion. All other auctions were successes because they beat CBO scoring. But spectrum auctions are always good regardless of whether they meet green eyeshaded accountants' predictions.

Moreover, the nation's economy benefits far more from the consumer welfare gains and tax revenues generated from authorizing new services through auctions than from the direct revenues generated from the auctions themselves.

Fourth, imposing, equipment standards, channel loading rules, efficiency standards, or any similar performance requirements, is generally unnecessary when flexible spectrum licenses are awarded through auctions.

Fifth, auction winners should make payment for their licenses when they are awarded. The FCC should not be placed in the conflicting roles of regulator of, and creditor to, its licensees.

These are principles based on sound economic thinking.

They maximize competition in the marketplace and minimize competition in the regulatory arena.

These are principles you have advocated for years.

I hope they are not rejected now in rush to meet budget targets or protect incumbent licensees.

Let me go over again in a little more detail some of the problems emerging on the Hill.

First, the House committee bill prohibits the Commission from assigning spectrum in channels 60-69 for public safety or commercial use unless the Commission finds a vacant channel for each qualifying low power TV station. As much as everyone would like to preserve service of these local, low-power operators, as a practical matter there simply is not sufficient spectrum today to accommodate each and everyone, although their audiences are immensely small. As a result, this provision effectively precludes the use of the highly valuable channels 60-69 for new services, including critical public safety applications. If we read the bill right, the public safety community has been dealt a terrible blow; lives that can be saved through new wireless technology are now at risk.

Second, the House Committee adopted a provision that would allow broadcasters to keep analog spectrum channels indefinitely if "more than five percent of households in [a] market continue to rely exclusively on over-the-air terrestrial analog TV signals."

At a time when many major newspapers were editorializing for an auction of the digital broadcast spectrum, advocates of providing broadcasters a new channel defended it on the grounds that it wasn't a giveaway; it was called a loan.

Precluding a return until fewer than five percent of households rely on analog signals would convert that loan to a gift.

If broadcasters promote DTV, the great majority of Americans will have converted to digital by buying set top boxes, digital cable, digital satellite, digital tv, or personal computers set up to receive DTV. But if five percent of the audience doesn't have the capacity to receive the new signal, then broadcasters can keep both channels under the proposed legislation. Where does this number come from? Almost five percent of the country doesn't have active telephone service. This is regarded as a small percentage that does not drive our telephone policies. Apologies to NBC, but more than five percent of the country probably thinks there is no such thing as "Must See TV." Why should that block of book readers drive TV policy?

But the Congress threatens to undercut all incentives to promote DTV. Rather, they may create disincentives for broadcasters to fulfill the commitment to provide digital service.

Congress would have done well to adopt the proposal of Congressman Ed Markey which required that all TVs manufactured after July 1, 2001 have the capability to receive digital television signals.

This proposal would have created an incentive to have transition and to have kept the promise of a return of the analog spectrum.

Third, the bill the House Commerce Committee adopted last Tuesday as part of the budget reconciliation contains provisions that establish budget-based revenue requirements for auctions. It requires the Commission to "establish procedures to secure aggregate winning bids totaling not less than two-thirds" of a budgeted amount. Worse it prevents us from granting licenses unless the auction has in fact raised at least two-thirds of the budgeted amount.

This provision undermines the auction process because bidders would have no assurance that they would be awarded a license at the fair market price determined by auction. The uncertainty created by this provision would reduce auction participation, impede capital formation, depress spectrum values, create barriers to entry for small businesses and delay licensing of spectrum for new technologies.

Fourth, the House Committee proposed to take away the Commission's ability to use auction revenues to run auctions. This provision would effectively eliminate all funding for our auction program because the appropriations committees would, in all likelihood, be unable to increase our appropriation in order to recover the shortfall. To date, our expenditures on auctions have totaled less than a third of one percent of the total revenue raised in our auctions -- far less than the two to three percent that private sector companies have proposed to charge for performing these same tasks for the Commission.

Since no additional funds have been appropriated for this purpose, the Commission would be forced to halt future auctions. We would also be unable to initiate or complete rulemakings to determine whether additional spectrum should be auctioned, administer the collection of auction revenues, implement enhancements to the bidding software, experiment with alternative auction methods such as combinatorial bidding, pay outside consultants and contractors including financial advisors, auction experts, software programmers and developers, bankruptcy counsel and the Department of Treasury, who assists the FCC in administering its debt collection obligations.

Fifth, both the House and Senate measures fail to adopt an Office of Management and Budget proposal giving the FCC authority to recover and reauction licenses held by bankrupt licensees. The House never included this authority in its bill. The Senate, which relied upon OMB's draft legislation for its mark-up, deleted this particular provision in committee.

Sixth the Senate bill makes it more difficult for the Commission to rely on marketforces to determine the highest valued use of spectrum. The bill limits the Commission's ability to grant flexible licenses -- potentially forcing the Commission to return to micromanaging the service, delivery and technology offered by licensees.

Seventh, both the House and Senate bills expand the category of users exempt from auctions by opening a loophole in the definition of "public safety" to include virtually every private network. Under the new provision, an internal corporate network that might be used to talk to a crane operator, for example, on a factory campus would be claimed to be an exempt public safety use.

The good news is there are also several pro-auction provisions in each bill. The Senate bill extends the authority of the Commission to auction spectrum until the year 2007; the House until the year 2002. Both bills also make more government spectrum available for private use.

However, the provisions that limit flexible use of market mechanisms to award licenses would reverse many aspects of the Commission's procompetitive spectrum policy.

Years ago, Republicans embraced auctions because they are consistent with the free-market philosophy.

I embraced auctions because, as a New Democrat, auctions are consistent with a philosophy of reinventing government that uses market mechanisms to produce public goods, such as competition.

I'm not here today asking you to embrace my philosophy. But shouldn't Congress embrace free market competition.

As David Brooks writes in his essay in the Weekly Standard, June 23, on Teddy Roosevelt, "corporations do seek unfair competitive advantage...by manipulating government. They lobby for...programs that reduce the risks they have to take to create and design new products and find new markets...They seek to entrench regulatory hurdles [for]...upstart competitors...."

He preaches that a sound "governing philosophy" (italics in text) for Republicans would recognize these realities of business-government relations and would pit Republicans against these inevitable efforts.

But he says that "[i]nstead, Republicans, overreliant on anti-statist rhetoric, have encouraged people to despise government or to think of Washington as some alien malevolence."

That feels accurate to me. Certainly, I've felt characterized as an "alien malevolence" from time to time.

But Brooks' point is a serious one. We need Congress to use government to promote sound economics and good policies for competition. I know you agree with Mr. Brooks; whatever your convictions, argue them with passionate intensity, please.

The country will be better for the debate.

Thank you.