Subject: [NEXTEL-1] Testimony of Michael Calabrese Director, Spectrum Policy Program New America Foundation-Before the U.S. Senate Committee

From: [email-masked]
Date: Thu, 08 Apr 2004 14:13:17 -0400

Testimony of Michael Calabrese Director, Spectrum Policy Program New
America Foundation
Before the U.S. Senate Committee on Commerce, Science and Transportation

“The Future of Spectrum Policy and
the FCC Spectrum Policy Task Force Report”
March 6, 2003

Good morning. My name is Michael Calabrese, director of the Spectrum
Policy Program at the New America Foundation, a nonpartisan public
policy institute here in Washington.  I actively participated in the FCC
Task Force process, primarily by speaking at two of the public workshops
last August and by filing three sets of comments on behalf of a
coalition of national consumer and other nonprofit groups. My testimony
today reflects the substance of the comments we filed in January, with
the Media Access Project, on behalf of the Consumer Federation of
America, Consumers Union, the National Alliance for Media Arts and
Culture, and other citizen groups.

Before highlighting our concerns about the Report, I’d like to
congratulate Dr. Paul Kolodzy and the rest of the FCC staff who served
on the Task Force for the dedication and high-caliber professionalism
they contributed to this policy review. As an outside participant, I can
attest that the staff process was as thorough, thoughtful and open to
diverse views as any I have seen in Washington.

We generally agree with the Task Force’s “Major Findings” and consider
them to be important building blocks for comprehensive spectrum
management reform. Particularly significant is the finding that
“spectrum access is a more significant problem than physical scarcity of
spectrum, in large part due to legacy command-and-control regulation . .
.”. The Report finds that emerging technologies – such as
frequencyhopping “smart” radio technologies – create “the potential for
development of services and uses that are not tied to specific frequency
bands,” or which can dynamically share “white space” within and between
existing allocations that currently lay fallow.  In particular, the
consumer group coalition strongly endorse what are perhaps the Report’s
two most central recommendations:

??First, that the traditional licensing system, based on rigid zoning,
be replaced by new, more valuable usage rights with enhanced service,
technical and market flexibility.  ??Second, that allocations of
unlicensed spectrum for open and shared access by the public should be
expanded – particularly for broadband wireless networking.

Concerning this second objective – expanding the share of spectrum open
to the public for unlicensed sharing – important progress is already
being made, most recently thanks to the bipartisan efforts of Senator
George Allen and Senator Barbara Boxer. Their Jumpstart Broadband Act,
which calls for additional unlicensed bands to facilitate highspeed and
low-cost wireless Internet access, has already helped to facilitate the
recent agreement between the Department of Defense and industry that
will enable unlicensed wireless networking in the 5 GHz band without
harmful interference to military radar.

A. The Future of Licensed Spectrum

While we agree with the Task Force that a new balance between the
“exclusive” rights model and the “commons” model is needed, the staff’s
proposed means to this end suggests a path at odds with the fundamental
principles of the Communications Act and the First Amendment. The Task
Force essentially recommends giving incumbent licensees exclusive and
permanent property interests in their frequencies (with no compensation
to the public) and also designating additional unlicensed “parks” for
shared public access (perhaps, if needed, but primarily on less
desirable high frequencies). In the future, access to the airwaves would
be a commodity traded on secondary markets and free of all obligations
except to avoid harmful interference with other users.  However sensible
such a “balance” between private property and public parks may sound in
theory, in practice the staff Report has embraced a blueprint for the
biggest special interest windfall at the expense of American taxpayers
in U.S. history. The Report implicitly endorses two transition
mechanisms – one based on a proposal by two of the Commission’s senior
economists, who served on the Task Force, released concurrently with the
Report – whereby permanent and exclusive rights to frequencies would be
given away to incumbent licensees at no charge.

We believe this Committee should reject any transition to “flexibility”
that is premised either on giveaways at taxpayer expense, or upon the
vesting of permanent property interests in frequencies, for two
fundamental reasons:
First, the economic benefits of “flexibility” can be achieved while
maintaining the Communications Act’s basic framework of granting
exclusive licenses only for limited (and relatively short) terms,
reserving residual rights to the public and obtaining, as appropriate, a
return to taxpayers for the exclusive, commercial use of frequencies.
Unless license terms are limited and license rights are conditional, as
under current law, policymakers will lose the ability to accommodate
greater sharing of frequencies, or otherwise reorganize access to the
airwaves, as technology and social needs evolve in the future. Just a
few years ago, the possibility of facilitating low-cost, wireless
Internet access using frequency-agile, software-defined radios capable
of dynamically sharing underutilized bands across wide ranges of the
spectrum was virtually unknown. Without the ability periodically to
review and refashion the rights of both licensed and unlicensed users of
the public airwaves, the ability of Congress or of the Commission to
exploit such advances for the general public interest could indeed be
squandered.

Second, the transition to a more flexible, market-oriented licensing
system can be accomplished without conferring a windfall worth hundreds
of billions of dollars on incumbents at taxpayer expense – and also
without “selling” spectrum at one-off auctions that imposes massive
up-front payments on bidders. The consumer coalition comments submitted
to the Task Force argued that auction and user fee methods are available
to accomplish the goals of spectrum allocation policy mandated by
Congress. These statutory goals include the efficient assignment of new
license rights among competing firms, securing a fair return to the
public and avoiding “unjust enrichment.”1 In contrast, the Task Force
recommends two options that would deprive the public of a return on the
airwaves and confer unearned windfalls on incumbent license holders to
the detriment of competitors. Under one option, “the Commission grants
expanded flexible rights directly to incumbents through modification of
their existing licenses.” The other option, noted above, is dressed up
as an “auction,” but one in which incumbents can opt to sell a permanent
property interest in the spectrum they now license and retain 100
percent of the revenue – money that under current law would flow to the
public treasury.2 Because incumbents can decide after the last bid is
made not to sell their spectrum – and still receive ownership of the
frequencies they now license – the incumbent is the only likely bidder
in most bands. The practical effect of the unusual two-sided auction and
band restructuring process proposed by the FCC economists is to allow
incumbents to acquire permanent ownership of their licensed spectrum, as
well as of adjacent guard bands and “white space” (reserve spectrum), at
little or no cost. This is not only unfair, but inefficient. When the
government fails to get market value for the commercial use of public
assets, the foregone payments increase other taxes, or increase the
deficit. A conservative estimate, based on the economic literature, is
that for every three-dollar increase in income taxes, there is an
additional dollar of lost productivity – a deadweight loss on top of the
windfall to incumbents.  Because the Commission does not have the legal
authority to pursue the two-sided giveaway transition described above,
the Task Force Report recommends “that Congress amend Section 309(j) of
the Act to include an express grant of authority to the FCC to conduct
two-sided auctions and simultaneous exchanges.” The logic of both
giveaway proposals favored by the Task Force appears to be that spectrum
incumbents have so much clout that the only practical way to reduce
scarcity is to bribe them to bring their spectrum to market. We urge
this Committee to deregulate spectrum management using a mechanism that
is consistent with the current legal framework of public ownership,
limited-term licensing and increased allocations of spectrum for
unlicensed sharing.

With few exceptions Section 309(j) of the Communications Act requires
the FCC to use auctions to award
mutually exclusive applications for spectrum license rights assigned to
commercial users. The enumerated objectives of spectrum auction policy
specified by Congress in the 1996 Telecommunications Act include
“recovery for the public of a portion of the value of the public
spectrum resource made available for commercial use and avoidance of
unjust enrichment through the methods employed to award uses of that
resource.”

A Modest Proposal: Spectrum Leasing

By embracing a false choice between “property” and “commons,” the Task
Force fails to consider an alternative that achieves the efficiencies of
“flexibility” without abandoning other statutory and Constitutional
values. Fully flexible and hence more valuable licenses can be assigned
in exchange for modest lease payments to the public by all commercial
licensees. Rather than giving away valuable new spectrum rights to
incumbents for nothing, or “selling” spectrum at one-off auctions that
impose massive up-front payments on bidders, the Commission should
“lease” spectrum for a set term of years, allowing commercial users
complete flexibility during the term of the lease.  We recommend that
Congress adopt a process that combines limited auctions (for new
assignments) with annual lease fees that would attach after the initial
license period (e.g., after 8 or 10 years), or sooner in the case of
current incumbents. All commercial incumbents could be given the option
to either accept the new, fully flexible license in exchange for paying
an annual lease fee, or to return their license at its expiration for
reauction.  The precedent for this approach is current law governing the
allocation of TV channels for digital broadcasting. When Congress
granted broadcasters the flexibility to use a portion of the new DTV
channel under the 1996 Act for ancillary services (for paid services
separate from the obligation to broadcast a primary “free” signal), it
provided that licensees must pay a market-based fee the FCC has set at 5
percent of gross revenue.  Similarly, the “rent” on spectrum could be
calculated as a percentage of the revenue generated through the use of
spectrum, or imputed based on the value evidenced by secondary market
transactions for spectrum with similar propagation characteristics.

The giveaway proposed by the FCC Task Force is contrary to all federal
and state
practice. Where scarce and valuable public assets are made available for
commerce, a
combination of auctions and lease fees generate billions of dollars in
public revenue. The
Bureau of Land Management and most states administer combinations of
auction and
leasing fees for the commercial use of public lands for extracting
minerals, logging
timber, grazing animals and securing rights-of-way for pipelines.3 For
example, in the
early 1980s Congress authorized a method known as “intertract
competition” to auction
mining rights to federal coal tracts in a similar situation, where
incumbent owners of
adjacent tracts were the only logical bidder.4 This auction process
forces incumbents to
3 An example of auction, lease and royalty fees paid on a public asset
is the Outer Continental Shelf Lands
Act of 1953, which has yielded over $122 billion in revenues to the
federal government and coastal state governments since 1954. The OCSLA
aims to provide "orderly leasing of these lands, while affording
protection of the environment and ensuring that the federal government
receives fair value for both lands leased and the production that might
result." Successful bidders for tracts pay a combination of "bonuses"
(up-front cash payments to secure a lease tract), rent of leased tracts
(to incent active use of the tract), and royalties (on oil or gas
production). Congressional Research Service, "Outer Continental Shelf:
Oil and Gas Leasing and Revenue," May 2000. Federal OCS revenue is
earmarked for investment through the Land and Water Conservation Fund, a
trust fund established in 1964 for the purpose of acquiring new
recreation lands, and the National Historic Preservation Fund.

Task Force.

Although spectrum is less tangible and less exhaustible than most other
public assets, to the extent that competing commercial users value
exclusive access to prime frequencies, which remain scarce, then leasing
fees for fixed periods can best optimize the policy goals specified in
the Communications Act. Leasing fees would serve several important
objectives: first, to avoid unjust enrichment and recover for the public
an ongoing and market-based return on the public resource of spectrum;
second, to provide a marketbased incentive for spectrum use efficiency,
particularly by incumbent licensees that now use the resource completely
free of charge; third, to reduce the up-front auction cost of the new
flexible license rights (and of new commercial assignments generally),
since bidders would not be anticipating permanent cost-free control of
the frequency; and, finally, to encourage capital investment by giving
the new incumbents an option to convert, after the initial license term,
to a leasing arrangement with expectation of renewal. All commercial
licensees would end up on a level playing field, benefit from a more
flexible and valuable licensing arrangement, and in return pay a modest
annual lease fee back to the public.

Our consumer group comments outlined a possible transition based on
flexible licenses, secondary markets, protecting incumbent capital
investments, and putting all commercial licensees on a level playing
field with respect to the cost of spectrum. One mechanism, most
favorable to incumbents, would give current incumbents an option to
renew their license with enhanced rights, including service flexibility
and the ability to sell or sublease (for the period of the license), in
return for paying a market-based user fee. If an incumbent declines to
participate, then these additional flexibility rights would be auctioned
as an “overlay” license, initially permitting any use that did not cause
harmful interference to the incumbent service already operating on the
band. Ideally the incumbent’s protection from harmful interference would
“wear away” after a reasonable number of years. In any case, auctions
should be used only for the competitive assignment of the initial term,
which could be quite short (and therefore not prohibitively expensive).
After the initial license term, the holder of a new flexible license
could choose to renew the license subject to a modest annual fee, or
return it for re-auction.

Reinvesting Spectrum Revenue in New Public Assets

Finally, when our nation monetizes a common asset, Congress and the
states have often chosen to earmark that windfall to pay for new public
assets of broad public benefit.  Examples include the Land and Water
Conservation Fund, which is funded by a portion of the more than $122
billion that has been collected under the federal Outer Continental
Shelf Lands Act, and the Alaska Permanent Fund, which pays an annual
dividend to every citizen of that state (nearly $2,000 per Alaskan last
year) from income earned on public royalties from North Slope oil.

Perhaps the most relevant way to think about reinvesting spectrum
revenue is for the purpose of fulfilling the “public interest
obligations” that originally justified giving broadcasters free access
to the airwaves. These unmet public needs include quality children’s
programming, educational innovation, local public service media and free
media time for political candidates to communicate with voters. Of
course, this last purpose – free airtime for federal candidates,
financed by a modest spectrum fee on broadcast licensees – was
introduced last year by Chairman McCain. We were proud to host the
policy forum where Senators McCain and Feingold first described the
proposal.  Another compelling use for spectrum revenue focuses on
modernizing American education. The “Digital Opportunity Investment
Trust,” initially proposed by former FCC Chairman Newton Minow and
former PBS President Lawrence Grossman, would support innovative uses of
digital technologies for education, lifelong learning, and the
transformation of our civic and cultural institutions. Under their
proposal, an initial $18 billion in future spectrum revenue would be
allocated to capitalize the trust fund, yielding a permanent revenue
stream of $1 billion or more for investments. We urge the Committee to
earmark future spectrum revenue for this important purpose.

B. The Future of Unlicensed Spectrum Sharing

Although we applaud the Task Force recommendation that “the Commission
should consider designating additional bands for unlicensed use,” we
were disappointed both by the Report’s tepid commitment to reallocating
frequencies below 5 GHz for unlicensed consumer devices in the future,
and by its restrictive approach to the opportunistic sharing of
underutilized spectrum.
As technology facilitates the sharing of frequencies, it becomes
critical that members of this Committee keep in mind the public interest
at the very core of this nation’s communications policy: the First
Amendment. The proper balance between what the Task Force calls the
“exclusive rights” model and the “commons” model for access to the
airwaves cannot be decided only, or even primarily, using economic
criteria. We must keep firmly in mind that when government requires a
license to communicate – or grants certain parties instead of others
“exclusive rights” to frequencies – this is a form of intrusive
regulation that necessarily burdens the ability of other citizens to
communicate.  Accordingly, where government does grant exclusive
licenses to communicate, it must do so for a good reason and in a manner
that promotes First Amendment values. Because only the practical need to
manage scarcity can justify licensing exclusive access to the airwaves,5
Congress should seek to minimize the need for licenses wherever
possible.  This Committee should therefore adopt an express preference
for unlicensed access over exclusive licensing. And when the FCC
considers additional unlicensed allocations or band-sharing
arrangements, the burden should fall to licensees to demonstrate that
actual harmful interference will result.

The Task Force’s own findings support the conclusion that whereas the
analog era may have justified a government grant of exclusive rights to
a band of frequencies, the development of digital and software-defined
(“smart”) radio technologies will make it feasible for individual
citizens to dynamically share wide ranges of underutilized spectrum
without imposing harmful interference on licensed or on other unlicensed
users.  Unfortunately, however, rather than embrace this opportunity to
expand unregulated citizen access and more efficient sharing of
frequencies, the Task Force recommends “that in the first instance” the
Commission should rely on private secondary market transactions to
facilitate shared access by citizens, entrepreneurs and local
governments.  The Report opines that licensees “will generally find it
advantageous to allow others to use unused portions of their spectrum if
they are adequately compensated” and that this will occur “at reasonable
transaction costs.”

We agree with this approach to the extent that the access sought would
result in actual harmful interference to a licensed incumbent’s ongoing
operations. To the extent that the unlicensed user would cause harmful
interference, the concept of enhancing license rights with complete
service, technical and market flexibility anticipates the licensee’s
ability to negotiate compensation in return for sacrificing (i.e.,
subleasing) its own access.  However, the Task Force recommends initial
and primary reliance on negotiated private transactions whenever the
user seeking shared access would be operating above a hypothetical
“interference temperature threshold” – a new quantitative measure that
would define the total level of RF emission a licensed operator must
tolerate in a given band. To the extent this “interference threshold” is
more restrictive than necessary to protect against actual harmful
interference – or to the extent the threshold concept is not applied to
today’s incumbent licensees (as the Report implies), or is not reviewed
and adjusted upward periodically to reflect advances in receiver
technology – it will deter access and sharing.

Moreover, the efficiency of requiring private secondary market
transactions breaks down precisely in the situation where dynamic
sharing will be most beneficial to the public interest – that is, with
low-power, relatively short range and spread spectrum transmissions
associated with sharing high-speed Internet access on a wireless basis.
Although the Report rather summarily concludes that private secondary
market mechanisms can be developed “at reasonable transaction costs,”
this will be least true for individual consumer devices, similar to
Wi-Fi and emerging “smart” broadband networks, that could easily be
deterred by access charges.

The ‘Special Case’ of Broadcast Spectrum

The Task Force Report expresses skepticism concerning the Commission’s
ability to reallocate to unlicensed citizen use another band comparable
to the 83.5 MHz available for a variety of consumer devices (from
cordless phones, to Wi-Fi, to microwave ovens) at 2.4 GHz, observing
“there is little ‘low-hanging fruit’ left for unlicensed band use.” Yet
with only 12 percent of U.S. households still relying on terrestrial
over-the-air broadcasting to receive their primary TV signal – and with
such a small share of the upper UHF channels in operation nationwide –
the broadcast TV bands may be the ideal 8 space to evolve in a
controlled manner, over a period of years, into a new “national park”
for open citizen access to the airwaves.
In this regard, the FCC’s current Notice of Inquiry on the compatibility
of spread spectrum unlicensed uses in the broadcast bands makes a good
beginning. This NOI has the potential to open more space to unlicensed
uses without ‘propertizing’ the spectrum first or disrupting existing
uses. It focuses on expanding the current benefits of the broadcast
bands to the American people, such as through the potential delivery of
new broadband services on an unlicensed basis. As the combination of
cellular 3G and unlicensed networking makes mobile, high-speed Internet
access a reality, consumers and companies will be clamoring for more
low-frequency airwaves that penetrate walls, trees and bad weather. The
TV bands are the “national spectrum park” that in the not-toodistant
future could boost the economy by facilitating high-speed broadband
access for both mobile and “last mile” connections.

Yet our nation’s outdated industrial policy concerning broadcast
spectrum will keep the broadcast bands encumbered for a decade or more.
We are making the wrong DTV transition; nearly 90% of American homes
rely on cable or spectrum-efficient satellite subscriptions for their
primary TV signal. Rather than subsidize broadcasters to continue analog
broadcasts indefinitely for fewer than 10% of the country, a hard
giveback date could be combined with a refundable tax credit for
consumers still relying on analog over-the-air. Paid for with just a
fraction of the potential auction or leasing revenue from the returned
spectrum, a credit on the order of $150 could give consumers the choice
to buy a converter box, or connect to a lifeline cable or satellite
subscription service.  This alternative – subsidizing consumers with a
fraction of the spectrum revenue – is opposite the Task Force approach,
which suggests both bribing the broadcasters with spectrum ownership and
relieving the broadcasters of their statutory public interest
obligations. Last June, this Committee wisely shepherded through
last-minute legislation to cancel the FCC’s scheduled auction of TV
Channels 52-to-69 – auctions designed to allow a handful of broadcast
companies, led by Paxson Communications, to pocket twothirds or more of
the billions that wireless phone companies seemed willing to bid for
space on Channels 60-to-69. The FCC action would have pared as much as
$20 billion from the President’s budget. Senator Hollings, then
Chairman, wrote in a letter to FCC Chairman Powell that allowing firms
to “transfer spectrum and earn profits on the spectrum through such
arrangements is outrageous” and violates the FCC’s role as “public
trustee of the spectrum.”

Now, less than a year later, the FCC Task Force returns with essentially
the same posture, stating that “the continued application of
command-and-control policies to commercial broadcasting spectrum could
be substantially relaxed, or may not be needed at all, . . .” This
ignores the fact that the 1996 Act gave broadcasters additional spectrum
valued at $70 billion on the specific condition that it be returned
after the DTV transition for public auction. We urge this Committee to
reject this giveaway approach and instead to move affirmatively to
hasten the return and reallocation of broadcast spectrum – ideally to
create a new unlicensed band for shared access and high-speed wireless
networking.

http://www.newamerica.net/Download_Docs/pdfs/Pub_File_1165_1.pdf

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