For Incentive Auctions, The FCC Reaps what it Sowed

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After three years of politicking, it now looks like Congress may actually give the FCC authority to conduct incentive auctions for mobile spectrum, and soon.  That, at least, is what the FCC seems to think.

At CES last week, FCC Chairman Julius Genachowski largely repeated the speech he has now given three years in a row.  But there was a subtle twist this time, one echoed by comments from Wireless Bureau Chief Rick Kaplan at a separate panel.

Instead of simply warning of a spectrum crunch and touting the benefits of the incentive auction idea, the Chairman took aim at a House Republican bill that would authorize the auctions but limit the agency’s “flexibility” in designing and conducting them. “My message on incentive auctions today is simple,” he said, “we need to get it done now, and we need to get it done right.”

By “done right,” Genachowski means without meaningful limits on how the agency constructs or oversees the auctions.  The Chairman’s attitude now seems to be if the FCC can’t have complete freedom, it would rather not have incentive auctions at all.  That’s a strange stance given the energy the FCC has expended making the case that such auctions are critical for mobile broadband users.

What’s the fight about?  The House bill would prohibit the agency from introducing bidder qualifications based on external factors, such as current spectrum holdings.  The FCC could not, in other words, directly or indirectly exclude carriers who already have significant spectrum licenses.  The agency would also be limited in its ability to attach special conditions to new licenses issued as part of particular auctions.  An amendment by Rep. Marsha Blackburn (T-Tenn.) that was approved last month would specifically forbid special net neutrality conditions.

This may sound like an inside-the-beltway spat, but the stakes are in fact quite high, going right to the core of what role the FCC should play in 21st century communications.  For the Chairman, these limits rise to the level of an existential crisis, casting doubt on the agency’s very nature as an expert regulator.  Congress should, he argued, authorize the auctions and let the agency’s staff of legal, economic and technical experts decide how best to organize them.  Tying the FCC’s hands by statute, he said, is “a mistake”:

because it preempts an expert agency process that’s fact-based, data-driven and informed by a broad range of economists, technologists and stakeholders on an open record. The proposals on the table to restrict the FCC’s flexibility in its area of technical expertise would be a significant departure from precedent.

Spectrum- and auction-related issues pose hard questions.  I believe they should be answered based on the evidence, on an open record, as close as possible to the time when they need to be made.

House leaders see it very differently.  They see an agency that badly bungled the recent 700 Mhz. auctions—the last major auctions the FCC has conducted.   As a pre-condition to bidding, for example, Google demanded “open access” conditions, which the FCC belatedly agreed to add.  Instead of answering “hard” questions based on “facts” and “data” in an open record, the agency simply gave in to pressure from a late and well-connected bidder.

There was no expertise applied here.  And the result, as I’ve noted elsewhere, was that bids for the C block (where the open access conditioned were applied) were discounted to the tune of billions of dollars that would otherwise have gone to the Treasury.

Verizon won the auction, but now faces uncertain application of the conditions, which differ materially from the open Internet rules the agency passed last year in the net neutrality rulemaking.  Meanwhile, the mobile marketplace is a very different place than it was when Google first stepped in, dominated by device  and operating system providers and proprietary app stores that didn’t even exist in 2008.

Larger bidders, meanwhile, wary of the vaguely-defined new conditions, shifted to the A and B blocks, pushing out smaller carriers.  Precisely the opposite result to what the agency intended in designing the auctions in the first place.

Politically-driven choices on how the D block should be licensed for public safety turned out even worse.  That auction could not find a bidder willing to live with the FCC’s conditions.  The spectrum sits unused, even as public safety still has no interoperable network more than a decade after 9/11.

If that’s what an “expert” agency with does with its “flexibility,” then it’s no wonder House leaders are skeptical.   “Flexibility” should mean maximizing revenues and ensuring that limited and critical spectrum assets are licensed to those who can put them to the best and highest use.  Not trying to stack the deck in favor of some bidders–and still getting it wrong.

Nothing has changed.  The agency still seems determined to use its auction authority to shape mobile broadband competition in its own sclerotic image.  It wants to create a competitive market among carriers even as competition is increasingly driven by other players in the mobile ecosystem.  It wants a return to the failed practice of unbundling to create an abundance of phantom competitors who have no assets and no understanding of communications, created by financial engineers who recognize a good regulatory arbitrage when they see one.

Not so, says the Chairman.  Our view of the market is deeply analytical, the result of thorough technical and economic analysis conducted by the bureaus.  His evidence?  The agency’s annual competition reports.  Or so he told CEA Gary Shapiro following his speech, when asked for proof that the agency understands the markets with which it tinkers.

But the competition reports are hardly models of lucid analysis.  They are constrained by the bureaus’ crabbed view of the market, a view required by the statutory requirements that generate the reports.  They continue to emphasize obsolete proxies for measuring competition, including HHIs and the spectrum screen, even as actual data on market conditions is relegated to the back of the report.  For the last two years, the mobile competition report pointedly refused to say whether the agency thought the market was competitive or not.

Yet the agency deliberately forfeited even the limited value of the competition reports by rejecting out-of-hand the AT&T/T-Mobile USA deal.  Rather than focusing on declining prices for voice, text, and data over the last ten years, or the regulatory constraints that make mergers necessary to expand coverage and service (both amply documented in the reports), the staff report on the T-Mobile deal largely swallowed the simplistic mantra of opponents of the deal that taking out one “national” carrier was per se anti-competitive.  The report’s principal objection seemed to be that any horizontal merger of two companies would result in one fewer competitor.  True, but irrelevant.

There was no sign of expert regulator at work here; nothing to suggest an analysis that was “fact-based, data-driven and informed by a broad range of economists, technologists and stakeholders.”  The analysis started with a conclusion and worked backwards.  And when even the old formulas didn’t come out right, at least in the case of the spectrum screen, the books were simply cooked until they did.

Well, that’s all water under the bridge in 2012.  “This is an incredibly fast-moving space,” the Chairman said of the need for flexibility, “and any policy that pre-judges or predicts the future runs a great risk of unintended and unfortunate consequences.”

That’s a good point.  But it’s also a perfect description of last year’s Net Neutrality rulemaking.  During a year of proceedings, the FCC turned up next to no evidence of an actual problem, let alone a market failure.  Still, the agency stuck doggedly to its first principals, insisting after-the-fact that “prophylactic” rules limiting network management technologies of the future were essential to maintaining a “level playing field.”  Never mind that the playing field showed no signs of imbalance, or that it continued to evolve dramatically (iPhone, iPad, Android and Verizon’s LTE introduction, for starters) as deliberations dragged on in a regulatory vacuum.

One “unintended and unfortunate consequence” of that and similar missteps has already become clear—Congress doesn’t trust the Chairman to follow the law.

Which is, I suspect, the main reason incentive auction authority hasn’t yet passed, even though nearly everyone agrees it’s the best short-term solution to a spectrum crisis of the government’s own making.  And why, when it does come, there are likely to be plenty of strings attached.

Which is too bad.  Because, if the FCC really acted as the expert agency it is chartered to be, Genachowski would be right about the value of flexibility.

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