Decision on a Streamlined Framework for Auctioning Residual Spectrum Licences

1. Through the release of this document, Innovation, Science and Economic Development Canada (ISED), on behalf of the Minister of Innovation, Science and Industry (the Minister), announces decisions resulting from the consultation process undertaken in Canada Gazette Notice SLPB-001-21, Consultation on a Streamlined Framework for Auctioning Residual Spectrum Licences (the Consultation).

2. Comments on the Consultation were received from:

• Bell Mobility Inc. (Bell)
• Canadian Electricity Association (CEA)
• Distributel Communications Limited (Distributel)
• ECOTEL Inc. (ECOTEL)
• ROCK Networks Inc. (ROCK)
• Rogers Communications Inc. (Rogers)
• Saskatchewan Telecommunications (SaskTel)
• TELUS Communications Inc. (TELUS)
• TerreStar Solutions Inc. (TerreStar)
• Xplornet Communications Inc. (Xplornet)

3. The Minister, through the Department of Industry Act, the Radiocommunication Act and the Radiocommunication Regulations, with due regard to the objectives of the Telecommunications Act, is responsible for spectrum management in Canada. As such, the Minister is responsible for developing national policies for spectrum utilization and ensuring effective management of the radio frequency spectrum resource.

4. The Framework for Spectrum Auctions in Canada (FSAC) describes the general approaches that ISED uses to auction spectrum licences. As a complement to the FSAC, this streamlined framework aligns with the policy objectives of the Telecommunications Act and the Spectrum Policy Framework for Canada (SPFC) to maximize the economic and social benefits that Canadians derive from the use of the radio frequency spectrum resource.

5. ISED is committed to the objective that all Canadian consumers, businesses, and public institutions have access to the most up-to-date telecommunications services at competitive prices. A robust Canadian telecommunications industry drives the adoption and use of digital technologies and enhances the productivity of the Canadian economy. Furthermore, connectivity has become even more critical during the COVID-19 pandemic, when Canadians have relied heavily on Internet access to stay connected, including in rural and remote regions of the country.

6. Spectrum is a critical resource in the telecommunications industry, enabling service providers to increase network capacity to meet the traffic demands of higher usage rates and support the provision of next-generation wireless technologies. ISED views the release of spectrum as an opportunity to enable existing and new providers to expand services and enhance connectivity in underserved areas and support continued competition in the market for consumers and businesses.

7. In May 2019, the Government of Canada released Canada's Digital Charter: Trust in a digital world (the Digital Charter). The Digital Charter lists universal access as the first of 10 principles that will lay the foundation for a made-in-Canada digital approach, and guide policy thinking and actions towards establishing an innovative, people-centred and inclusive digital and data economy built on trust. Universal access is the principle that all Canadians will have an equal opportunity to participate in the digital world and have the necessary tools to do so, including access, connectivity, literacy and skills. ISED recognizes affordability as a key component of universal access, and that greater access to spectrum will enable sustained competition that allows consumers and businesses to benefit from greater choice and more competitive prices.

8. The Government of Canada is also committed to promoting the delivery of broadband services to rural and remote areas across the country. In 2019, High-Speed Access for All: Canada's Connectivity Strategy was launched, which aims to make speeds of at least 50 megabits per second (Mbps) download and 10 Mbps upload available to all Canadian homes and businesses, and to improve mobile wireless access from coast to coast to coast. To reach these objectives, ISED is examining approaches to support and encourage service providers in rural and remote areas.

9. In this context, the decisions set out in this streamlined framework support the policy objectives of the Telecommunications Act, the SPFC, the Digital Charter and Canada's Connectivity Strategy by establishing a framework that:

• facilitates the deployment and timely availability of high-quality services across the country to promote connectivity in rural and remote regions
• fosters investment and the evolution of wireless networks by enabling the development of innovative and emerging applications
• supports sustained competition in the provision of wireless services so that consumers and businesses benefit from greater choice and competitive prices

10. Since 1999, ISED has generally used spectrum auctions to award spectrum licences when the demand for licences was expected to exceed supply. Prior to each process, ISED consults on a variety of factors, including conditions of licence, opening bids, competitive measures, as well as the auction format and the proposed rules. This provides an opportunity for interested parties to comment on all aspects of the policy related to a specific auction, the auction design, and the licensing procedures and applicable rules. The input received allows ISED to consider the views and perspectives of stakeholders in its decision-making process.

11. In some cases, licences offered in a competitive process remain unallocated at the conclusion of the process. In other cases, previously assigned licences are not renewed or are returned to ISED by a licensee prior to the end of the licence term. These licences are referred to as residual licences. ISED generally makes residual licences available through a subsequent auction process. In May 2018, ISED's most recent auction of residual licences made 67 licences available across various bands (700 MHz, 2500 MHz, 2300 MHz and Personal Communications Services (PCS)) in service areas across Canada, primarily in rural and remote areas.

12. Auctions of residual licences typically include a full consultation where stakeholder input is sought on all matters related to the new residual licence auction process, including whether any of the elements should change from the respective licensing framework that first offered the licences and the format of the auction. Extensive consultation for an auction of residual licences delays allocating licences to interested operators, while also requiring them to invest their efforts and resources into developing formal comments.

13. ISED is of the view that making these residual licences available in a timely manner and allocating them to operators who will put them to use is critical for facilitating deployment and the timely availability of services, particularly in rural and remote communities. As such, in the Consultation ISED proposed a streamlined framework for auctioning residual spectrum licences that adopts a notice-based approach to minimize the elements requiring consultation and facilitate access to residual licences, while establishing a predictable and consistent format for future auctions.

14. Through the approach detailed in section 6, ISED would announce an upcoming auction of residual licences by publishing a notice that details the information necessary for interested parties to participate in the auction, without undertaking further consultation. When necessary, ISED would launch a short, targeted consultation with respect to certain licensing changes being considered before publishing the notice of upcoming auction. This would limit the need for consultation, where ISED would seek the views of stakeholders, to significant changes.

15. In the Consultation, ISED proposed an approach for streamlining auctions of residual licences without necessitating consultation. Section 6 outlines stakeholder views regarding the proposals, along with ISED's responses and rationale for decisions related to the adopted approach to streamlining future auctions of residual licences. In particular, this section outlines different situations regarding changes to the characteristics or conditions of a licence that would or would not result in a consultation prior to an auction of residual licences. Note that while the decisions set out below conclude that many situations would not require consultation, ISED may always choose to consult at its own discretion.

6.1 Applicable licences

16. As proposed in the Consultation, this streamlined framework would only be used to auction residual spectrum licences, defined as:

• spectrum licences that remain unallocated at the conclusion of an auction process
• spectrum licences that have not been renewed, were previously assigned but have been cancelled by ISED, or have been returned to ISED by a licensee prior to the end of the licence term

6.2 Licence characteristics

17. In the Consultation, ISED sought comments on its proposal to not consult on:

• potential changes to tier sizes in response to observed demand
• opening bid prices that are equal to or lower than the opening bid prices set in the initial licensing framework

Summary of comments

18. ECOTEL, ROCK and TerreStar supported both proposals to not consult on potential changes to tier sizes or on opening bid prices that are equal to or lower than the prices from the initial licensing process. ECOTEL and ROCK added that smaller tier sizes and lower prices would make the spectrum more affordable for new market entrants, regional operators, innovators and private networks.

19. Bell and TELUS opposed both proposals, stating that the reason for low or no demand may result from competitive measures and that removing these measures may make it unnecessary to modify the tier size of the licence or reduce opening bid prices. Bell and TELUS added that modifying tier sizes to smaller coverage areas could increase potential interference and coordination efforts required to effectively deploy the licences, and that such changes should be subject to consultation. Rogers expressed a similar position but did not oppose the proposals and added that if ISED does not consult, it should consider the characteristics of the spectrum and the recommendations from the initial consultation.

20. Tier sizes: Distributel, SaskTel and Xplornet opposed the proposal to not consult on potential changes to tier size. SaskTel and Xplornet both stated that potential changes to tier sizes should be subject to consultation. Distributel added that tier size should be subject to consultation prior to an auction of residual licences whether or not changes are being considered.

21. Opening bid prices: Distributel, Rogers and SaskTel supported the proposal to not consult on opening bid prices that are equal to or lower than the opening bid prices from the initial licensing process for those licences. However, Rogers added that prices should not be reduced for licences that were set-aside in the initial auction process. Xplornet added that lower opening bid prices could encourage parties to bid for licences, without potentially negatively impacting demand or hindering the efficient deployment of spectrum.

Discussion

22. ISED is of the view that the comments stakeholders submit on tier sizes during the consultation for the initial auction would remain relevant to a subsequent auction of residual licences, and that it would be unnecessary to re-consult on tier sizes.

23. Recognizing that, depending on the characteristics of the frequency band and the type of services that are expected to be deployed, reducing the tier sizes for residual licences could potentially result in increased interference and coordination issues that could delay the deployment of the spectrum or make its use less effective, ISED expects that in general, the tier sizes used in the initial auction process will be maintained when auctioning residual licences.

24. However, in some cases, such as for large and/or remote geographic areas where ISED observed nil (zero) demand in the initial auction, licences could potentially be subdivided into smaller tier sizes that could meet the needs of potential bidders without having a significant impact on potential interference or coordination. Furthermore, a bidder interested in the original tier size would still be able to submit bids for the combination of smaller licences that make up the original tier. In these cases, ISED will weigh the potential benefits of reducing tier sizes based on the characteristics of the spectrum and the comments from the initial consultation to determine whether it is appropriate to subdivide a licence into smaller tier sizes.

25. ISED remains of the view that there is no need to consult on reducing opening bid prices given that opening bid prices were already consulted on during the initial auction process and that the established prices represent the maximum possible opening bid prices for residual licences.

26. Note that if ISED subdivides a licence into smaller tier sizes or amends the licence term as discussed in section 6.4, it would also likely result in ISED reducing the price of the licence to align with the subdivided tiers or the shorter term of licence. In both of these cases, ISED is of the view that there is no need to consult on the opening bid prices, as prices would simply be adjusted proportionately.

27. With respect to stakeholder comments that competitive measures should be addressed before licences are modified based on evidence of low demand, ISED notes that there may be other reasons that licences experience low demand during the initial auction apart from competitive measures, and ISED's specific approach to competitive measures is addressed in section 6.3.

Decision

6.3 Competitive measures

28. In the Consultation, ISED sought comments on its proposal to only consult on competitive measures for an auction of residual licences when it is considering competitive measures that differ significantly from the measures used in the initial licensing process for those licences.

Summary of comments

29. ROCK, Rogers, SaskTel, TerreStar and Xplornet supported the proposal, with TerreStar and Xplornet both stating that any changes to competitive measures should be considered significant. ROCK suggested that previous winners of set-aside licences should not be allowed to bid on residual set-aside licences.

30. ECOTEL recommended that competitive measures should be expanded to make spectrum more available to innovators.

31. Bell and TELUS each opposed maintaining competitive measures in residual auctions. Bell stated that these licences will have already been demonstrated to be in low demand and that competitive measures will further limit interest in and competition for these licences. TELUS suggested that eligibility restrictions such as set-asides should be lifted as a matter of process, without consultation, when such licences remain unallocated following the initial auction process. Rogers also stated its opposition to the use of set-asides, arguing they prevent spectrum from being allocated to those who value it the most and will be able to put that spectrum to use.

32. Distributel opposed the proposal, stating that competitive measures must be tailored to the market conditions at the time of the residual auction. This includes a market test to determine whether the ecosystem has significantly changed since the main auction, an impact test to determine whether the pro-competitive measures resulted in the acquisition of affordable spectrum for smaller players, and a consultation to determine whether the competitive measures remain relevant.

Discussion

33. As established in the FSAC, competitive measures are an important tool in promoting a competitive post-auction marketplace. In previous auctions of residual licences, ISED has maintained the competitive measures that were established in the initial auction process.

34. ISED notes that competitive measures are not determinative as to why licences may be unallocated in an auction. For example, the winner determination process involving combinatorial bidding could result in a winning combination of packages that excludes a licence another bidder would have been interested in obtaining. In other cases, circumstances such as competing priorities or financial limitations may have required interested bidders to focus their bidding elsewhere during the initial auction. As such, ISED is of the view that it should not automatically remove competitive measures on licences prior to them being offered in an auction of residual licences.

35. Given that this streamlined framework will enable ISED to reduce the period of time between the initial auction and the auction of residual licences, ISED is of the view that the competitive measures used during the initial auction process would generally remain relevant at the time of the subsequent auction of residual licences. ISED is similarly of the view that since these competitive measures are established through extensive consultation with stakeholders, further consultation would be unnecessary prior to maintaining them for residual licences.

36. ISED may consider whether changes to competitive measures are warranted to correspond to changes to the tier size of a licence or significant changes in market conditions, or if ISED determines that changing competitive measures would better serve ISED's policy objectives for a licence. In these cases, ISED recognizes that any changes to competitive measures should be considered significant and would benefit from stakeholder feedback through a short, targeted consultation.

37. In cases where residual licences have gone unallocated in at least one auction of residual licences, ISED will assess the demand for the licence and may lift the applicable competitive measures without consultation in a subsequent auction of residual licences.

Decision

6.4 Conditions of licence

38. As noted in the Consultation, licences are always subject to the relevant provisions in the Radiocommunication Act and the Radiocommunication Regulations. As such, the Minister continues to have the power to amend the terms and conditions of spectrum licences pursuant to paragraph 5(1)(b) of the Radiocommunication Act.

39. In the Consultation, ISED sought comments on its proposal to not consult on the applicable conditions of licence when they are the same as the conditions established in the initial licensing process offering those licences or when the conditions have been amended as a result of another consultation.

40. ISED also sought comments on its proposal to not consult on amending the term of a residual licence to align its expiration date to the same or approximate expiration date for licences in the same band that were allocated during the initial auction process for that band.

41. Finally, ISED sought comments on its proposal to not consult on amended deployment requirements when they are modified to respond to observed demand or to correspond to changes in the characteristics or conditions of licence.

Summary of comments

42. Bell, ROCK, Rogers, SaskTel, TerreStar and Xplornet supported the proposal to not consult on the applicable conditions of licence when they align with the licences issued through the initial licensing process.

43. Distributel submitted that a market test and impact test should be conducted prior to the residual auction process to determine whether the conditions of licence and deployment requirements from the main auction should be re-applied for the residual auction, adding that based on the results of these tests, the conditions of licence and deployment requirements should be adjusted accordingly to favour participation from smaller players.

44. Licence term: Almost all respondents supported ISED's proposal to align the term of licence. ROCK and Rogers both added that a shortened licence term should result in a commensurate reduction in the opening bid price of the licence(s). Bell opposed the proposal, noting that longer licence terms would be more appropriate in consideration of the significant investments required by carriers to deploy spectrum, that there are limited efficiencies to be gained by harmonizing the expiry date of all licences within a band, and that shortening the term reduces that value of the licence.

45. Deployment requirements: ECOTEL, SaskTel and TerreStar supported the proposal to not consult on amended deployment requirements when they are modified to respond to observed demand or to correspond to changes in the characteristics or conditions of licence, but added that more onerous deployment requirements should require public consultation. Bell did not object to the proposal, and Rogers supported the proposal, as long as deployment requirements are consistent with those of the licences available in the initial auction process and not reduced beyond what is required to account for changes in the characteristics or conditions of licence.

46. TELUS supported maintaining deployment requirements, but strongly opposed amendments without public consultation and recommended instituting a use-it-or-lose-it policy for all spectrum licences. Similarly, the CEA recommended attaching a use-it-or-share-it policy to all spectrum licences that forces licensees to share spectrum in areas where it is not being used, and ECOTEL recommended adding strict subordination rules for all upcoming licences to be auctioned.

47. Xplornet stated that any changes to the characteristics of a licence should be consulted on, and that those consultations should include assessing associated modifications, such as deployment requirements.

Discussion

48. ISED consults on the conditions of licence as part of the initial licensing process for each spectrum auction. This includes conditions such as licence term, transferability, divisibility and subordinate licensing, deployment requirements, eligibility, treatment of existing spectrum users, technical considerations, lawful interception, research and development, and other conditions.

49. Given that the objective of this streamlined framework is to expedite the process for auctioning residual licences, ISED expects that market conditions at the time of an auction of residual licences should remain relatively similar to those at the time of the initial auction. As such, the established conditions of licence and deployment requirements should remain relevant and should remain consistent with ISED's policy objectives.

50. In some cases, a condition of licence may have changed following a wider consultation on a condition that applies across a number of bands, such as provisions on tower siting, tower sharing, or roaming. Given that these have also already been consulted upon and apply generally across bands, ISED is of the view that it would not be necessary to re-consult on these conditions of licence specific to an auction of residual licences, and will update the conditions of licence as required.

51. Changes to the tier size of a licence may require adjusting deployment requirements to remain consistent with the policy objectives for the deployment requirements established for licences issued through the initial auction process. ISED is of the view that it would not be necessary to consult on the applicable conditions of licence or deployment requirements when they are aligned with those established in the initial licensing process or when deployment requirements are adjusted for changes to the tier size of a licence.

52. As noted in the Consultation, ISED has historically favoured longer terms of licence to attract the financial investment required to deploy next generation wireless services. ISED recognizes that aligning the term of licence may have an impact on residual licensees depending on the amount of time that has elapsed since the initial auction. However, ISED expects that this streamlined framework will allow ISED to shorten the period between the initial auction process and an auction of residual licences.

53. Furthermore, as indicated in the licensing frameworks for previous spectrum auctions, at the end of an initial licence term, licensees would typically have a high expectation that the licence would be issued for a subsequent term through a renewal process unless a breach of licence condition has occurred, a fundamental reallocation of spectrum to a new service is required, or an overriding policy need arises. This high expectancy of renewal should mitigate the impact of a shorter licence term. As such, ISED is of the view that amending a licence term to align with the licences acquired through the initial auction process would not substantially disadvantage residual licensees while also potentially simplifying future spectrum planning.

54. ISED notes that aligning the expiration date of licences within the same band will require residual licensees to meet the end-of-licence deployment requirements at the same time as licensees who obtained their licence through the initial auction process. ISED is of the view that the time horizon for meeting this requirement (e.g. 20 years) should generally be sufficiently distant to not disadvantage residual licensees. Deployment requirements within the term of a residual licence (e.g. at 5 or 10 years) will be assessed as indicated in the licensing framework that initially offered the licence.

55. ISED notes that a short, targeted consultation would be undertaken if it is considering conditions of licence or deployment requirements that are not consistent with those established through the consultation during the initial licensing process.

Decision

6.5 Auction design

56. In the Consultation, ISED sought comments on its proposal to use a sealed-bid auction format with a second-price rule for future auctions of residual licences. ISED also sought comments on its proposal to retain the option to allow combinatorial (package) bidding when ISED deems it appropriate to do so.

Summary of comments

57. ECOTEL, TerreStar, Xplornet and ROCK supported the use of a sealed-bid auction with a second-price rule. However, ECOTEL expressed concern that combinatorial bidding is likely to favour larger entities, and ROCK added that combinatorial bidding should not be allowed to cross provincial boundaries.

58. Bell, Rogers and TELUS supported the auction design as proposed in the context of residual licences but expressed preferences for formats that include a price discovery phase. TELUS added that ISED should establish specific criteria to determine whether a sealed-bid auction is appropriate and that one should not be used if a significant period of time has elapsed since the initial auction, or if products have been changed such that price discovery from the initial auction is no longer relevant.

59. SaskTel supported the use of the sealed-bid auction format and second-price rule for licences that went unallocated in auction, but not for licences that have been returned to ISED, stating that public consultation is required to properly assess the demand for returned licences before determining the auction format. SaskTel also added that consultation should determine whether combinatorial bidding is appropriate.

60. Distributel suggested that unless the amount of spectrum is very small, ISED should consult on the auction format to be used for a residual auction since it does not allow for a price discovery phase, and that this automatically advantages conventional bidders and/or those with experienced teams familiar with the spectrum auctions.

Discussion

61. As stated in the FSAC, ISED seeks to select an auction design that is optimal for the spectrum being offered and the circumstances that exist at the time. The format should be simple, fair and transparent for bidders and lead to an efficient assignment of spectrum. In doing so, ISED considers the characteristics of the spectrum being auctioned; for example, the quantity and size of the blocks, as well as the similarities and complementarities that may exist among the blocks.

62. As indicated in the Consultation, ISED proposed using a sealed-bid auction format given the anticipated nature of the licences that would be available for future auctions of residual licences. The sealed-bid auction format was also used for previous auctions of residual licences, specifically the Auction of Residual Spectrum Licences in the 700 MHz, 2500 MHz, 2300 MHz and PCS-G Bands in 2018 and the Auction of Residual Spectrum Licences in the 700 MHz and AWS-3 Bands in 2015.

63. Unallocated licences: ISED notes that the objective of this streamlined framework is to expedite the process for an auction of residual licences so that these licences are available to stakeholders in a timelier fashion after going unallocated in the initial auction process. ISED is of the view that shortening the time elapsed between the initial auction(s) and subsequent auctions of residual licences would generally ensure that bidding data from the initial auction would provide potential bidders with relevant price discovery information on the established value of the licences. Given that this information is made available publicly following the close of the initial auction, all potential bidders would be able to benefit from the bidding data. Although other formats provide stakeholders with the benefit of a price discovery phase through multiple rounds, ISED is of the view that the complexity and length of these formats are not warranted in the context of an auction of residual licences.

64. Returned licences: Section 5.7 of Client Procedures Circular CPC-2-1-23, Licensing Procedure for Spectrum Licences for Terrestrial Services, states that when a licensee returns a spectrum licence to ISED, the associated spectrum will be made available in a timely manner unless a specific policy issue requires it to be withheld. In such cases, ISED will publicly announce the availability of the spectrum and will call for expressions of interest to determine demand. This process will determine whether it is appropriate to include the returned licence in a residual auction. ISED is of the view that the number of licences that are returned and included in residual auctions would be relatively limited, and that consulting on an auction format specifically for such licences would unnecessarily delay access to the spectrum.

65. Given that residual licences would typically represent a relatively small amount of spectrum across various bands for which the value should already be well established, ISED is of the view that the sealed-bid auction format would generally be the optimal format for residual licences, including both unallocated and returned licences. If ISED considers that a different auction format may be more appropriate for auctioning residual licences, ISED will make this format the subject of a short, targeted consultation.

66. Second-price rule: A second-price rule, as set out in annex A, promotes a more efficient outcome by increasing the incentive for a bidder to submit bids that reflect how it truly values the licences. Since bidders will only be required to pay the amount determined by the second-price rule, there is greater incentive to bid truthfully. All respondents generally supported this proposal.

67. Combinatorial (package) bidding: When multiple licences are offered across a number of geographic areas, there may exist complementarities or interdependencies between regional licences. As indicated in the Consultation, in such cases a single-round sealed-bid auction introduces the risk (called exposure risk) that a bidder may win some but not all the licences required for its business plan. ISED remains of the view that combinatorial bidding could mitigate exposure risk by allowing bidders to express their values for the complementarities or interdependencies that might exist between licences in different geographic areas. ISED also notes that the suitability and form of combinatorial bidding for each specific residual auction will be determined based on the residual licences available and will be published in the notice of upcoming auction at that time.

Decision

6.6 Unallocated licences

68. As stated in the Consultation, licences that remain unallocated following an auction of residual licences will be retained by ISED and consideration will be given to making them available through an alternative process at a later date. The timing and form of such a process will depend on the demand for the licences.

6.7 Auction process and bidder participation

69. In the Consultation, ISED sought comments on its proposal to not consult on the elements of auction process and the rules for bidder participation in advance of publishing a notice of upcoming auction of residual licences. ISED instead proposed that the published notice would detail the residual licences available (blocks and tier sizes), the competitive measures, the opening bid prices, the conditions of licence, information on the auction process, the rules for participating in the auction, and a Table of Key Dates.

70. ISED also sought comments on its proposed timelines for a streamlined residual auction where no consultation is undertaken prior to the auction.

Summary of comments

71. Bell, Distributel, ECOTEL, ROCK, Rogers, SaskTel, TELUS, TerreStar and Xplornet all supported ISED's proposal to not consult on the elements of auction process and the rules for bidder participation prior to an auction of residual licences.

72. Timing (Table of Key Dates): Bell, ROCK, Rogers, SaskTel, TELUS and Xplornet all supported the timelines proposed in the Consultation. Xplornet added that the time to submit applications to participate in the auction and financial deposits could be reduced from 55 days to 40 or 45 days. ECOTEL proposed a 50-day timeline to submit the initial deposit, and TerreStar proposed increasing the period between the publication of clarification questions and responses and the deadline for submitting applications from 25 to 40 days.

73. Distributel submitted that the timeline between the publication date and the deadline for submitting applications should increase by two to three months, suggesting that the proposed timelines would not provide potential bidders with sufficient time to assess the spectrum offered, determine valuations, prepare business plans, secure financing, and secure any external expertise that may be required.

Discussion

74. As indicated in the Consultation, the elements of auction process and the rules for bidder participation, such as rules regarding affiliated and associated entities, the prohibition of collusion and other communications, and auction integrity and transparency, are consulted on and established as part of the initial auction process. Furthermore, these elements have remained generally consistent across auction processes. ISED remains of the view that it would not be necessary to re-consult on auction process and rules for bidder participation when auctioning residual licences.

75. ISED acknowledges that potential auction participants may require a certain amount of time to evaluate the licences being offered, prepare their business plans and valuations, and to seek funding to participate in the auction. Given that all residual licences will have at least been offered through an initial licensing process, interested bidders may also have had the opportunity to assess their values and potential business plans during the initial auction process or from the published bidding data for the initial auction. Therefore, ISED is of the view that significantly increasing the proposed timelines would unnecessarily delay getting licences into the hands of operators who could otherwise put those licences to use.

76. However, ISED acknowledges that smaller participants or those less familiar with the auction process could benefit from additional time between the publication of the clarification questions and responses and the deadline to apply to participate in the auction. As such, ISED will increase this period from an estimated 25 days to 35 days, and the total estimated timeline to 140 days, as indicated in table 1, below.

77. The above timeline reflects the approximate amount of time required from the date of publication to implement an auction of residual licences without consultation, and ISED would likely be required to tailor the timelines to accommodate weekends and holidays. Exact dates will be established in the Table of Key Dates published in the notice of upcoming auction. Note that additional time would be required if ISED opts to consult on any issues prior to launching an auction process. In such cases, the consultation would include a new proposed Table of Key Dates for stakeholders to provide comments. ISED may also update the Table of Key Dates without consultation in order to accommodate any unexpected circumstances.

78. All spectrum-related documents referred to in this paper are available on ISED's Spectrum Management and Telecommunications website.

79. For further information concerning the process outlined in this document or related matters, contact:

Innovation, Science and Economic Development Canada
c/o Senior Director, Spectrum Licensing Policy Branch
235 Queen Street (6th Floor, East Tower)
Ottawa ON K1A 0H5
Telephone: 343-551-0539
TTY: 1-866-694-8389
Email: spectrumauctions-encheresduspectre@ised-isde.gc.ca

The secondprice rule would determine the prices to be paid such that the price for a winning bidder will be at least the opening bid price, but no higher than the submitted bid amount. Second prices are often referred to as Vickrey prices and represent the opportunity cost of the bidder winning the licence or package. More specifically, ISED will apply bidderoptimal core pricing using the nearest Vickrey approach.

When licences are made available for package bidding, bids can be made for individual licences and/or a combination of the available licences. Winning bids will be calculated by determining the combination of bids that generates the highest sum.

The Vickrey price(s) could depend on package bids and/or bids for the individual licences as well as the opening bid prices for the licences. In addition, with package bidding, an extra payment beyond Vickrey prices is sometimes required as a result of interaction between overlapping bids. In the event that an extra payment is required, the payment to be made will be adjusted so that it is proportionate to the size of the bidder's package, in terms of value at opening bid prices.

The second or Vickrey price for each winning bidder (known as “Bidder J” in this explanation) is calculated as follows. First, subtract Bidder J's winning bid (value A) from the value of the winning combination. Next, recalculate the winning combination for the hypothetical situation in which all Bidder J's bids are excluded, as if Bidder J had not participated (value B). The Vickrey price for Bidder J is calculated as the value of the winning combination with all Bidder J's bids excluded (value B) minus the sum of the winning bids for all bidders other than Bidder J (value A); that is, value B minus value A. This is the minimum amount that the winning bidder could have bid in order to still have won, given the bids of all other bidders.

The prices to be paid by winning bidders must satisfy the following conditions:

1. First condition: The price for a winning bid must be greater than or equal to the opening bid price(s) for the licence(s) in the bid, but not more than the dollar amount of the winning bid.
2. Second condition: The set of prices must be sufficiently high that there is no alternative bidder, or group of bidders, prepared to pay more than any winning bidder or group of winning bidders. If there is only one set of prices that meets the first and second conditions, this determines the prices to be paid.
3. Third condition: If there is more than one set of prices that fulfils the first and second conditions, the set (or sets) of prices minimizing the sum of prices across winning bidders is (are) selected. If there is only one set of prices satisfying these three conditions, this set determines the prices.
4. Fourth condition: If there is more than one set of prices that satisfies the first three conditions, the set of prices that minimizes the weighted sum of squares of differences between the prices and the Vickrey prices will be selected. The weighting is relative to the price of the bidder's package evaluated at opening bid prices. This approach for selecting among sets of prices that minimize the sum of prices across winning bidders is referred to as the “nearest Vickrey” approach.

These conditions characterize a unique set of prices such that each winning bidder pays no more than the dollar amount of its winning bid and pays at least the opening bid price(s). ISED staff will calculate the set of prices that meet the conditions outlined above.

The following is an example of how prices are calculated, based on Spectrum Auction Design [PDF: 1,085 KB] by P. Cramton.

Suppose five bidders, 1, 2, 3, 4 and 5, are bidding for two licences, A and B. The following bids are submitted (“b” designates the bidder):

• b₁{A} = $28
• b₂{B} = $20
• b₃{AB} = $32
• b₄{A} = $14
• b₅{B} = $12

The bids of the five bidders are represented in figure A1.

In this example, the highest value combination of bids would assign licence A to Bidder 1 and licence B to Bidder 2, generating $48 in value. There is no other assignment of licences that yields a higher value.

To calculate the Vickrey price for Bidder 1, its winning bid ($28) is subtracted from the value of the winning combination ($48), resulting in $20. Next, the winning combination is recalculated for the hypothetical situation in which Bidder 1's bids are excluded. The best assignment, excluding Bidder 1, assigns licence A to Bidder 4 at $14 and licence B to Bidder 2 at $20, resulting in $34. The Vickrey price for Bidder 1 is the value of the winning combination of packages with all Bidder 1's bids excluded ($34) less the sum of the winning allocation stage bids for all bidders other than Bidder 1 ($20); that is, its Vickrey price is $14 ($34 - $20).

Similarly, to calculate the Vickrey price for Bidder 2, its winning bid ($20) is subtracted from the value of the winning combination ($48), resulting in $28. Next, the winning combination is recalculated for the hypothetical situation in which Bidder 2's bids are excluded. The best assignment, excluding Bidder 2, assigns licence A to Bidder 1 and licence B to Bidder 5, resulting in a value of $40. The Vickrey price for Bidder 2 is the value of the winning combination of packages with all Bidder 2's bids excluded ($40) less the sum of the winning allocation stage bids for all bidders other than Bidder 2 ($28); that is, its Vickrey price is $12 ($40 - $28).

Hence, the Vickrey outcome is for Bidder 1 to pay $14 for licence A and for Bidder 2 to pay $12 for licence B. Total revenues with these payments are $14 + $12 = $26. As shown in figure A1, this means that Bidder 1 can reduce its bid to $14 before being displaced by Bidder 4. Similarly, Bidder 2 can reduce its bid to $12 before being displaced by Bidder 5.

Figure A1: Example of calculating prices (in dollars)

However, these payments sum to $26, which is less than Bidder 3's bid of $32 for both licences A and B. Therefore, Bidder 1 and Bidder 2 must split an additional payment of $6 ($32 - $26), to ensure that their combined payment is greater than that of Bidder 3, satisfying the condition that no other bidder or group of bidders was prepared to pay more for the licences in question. That is, Bidder 1 and Bidder 2 must pay, collectively, at least $32.

If the opening bid prices for licence A and licence B are the same amount, the additional payment of $6 is split equally between the two bidders. Each bidder is therefore paying an additional $3 above its Vickrey price, with Bidder 1 paying $17 ($14 + $3) and Bidder 2 paying $15 ($12 + $3), as shown in figure A1.

However, if the opening bid prices for the two licences are different amounts, the two bidders must split the extra payment proportionately to the opening bid amounts (the fourth condition). For example, if the opening bid price for licence A is $8 and the opening bid price for licence B is $4, then the opening bid price of Bidder 1's package is twice as large as that of Bidder 2. Therefore, Bidder 1 would pay twice as much as Bidder 2 of the extra payment, with Bidder 1 paying an additional $4, for a total payment of $18 and Bidder 2 paying an additional $2, for a final payment of $14.

In the event of a tie during the second-price calculation, a pseudorandom generator will be used to decide between tied outcomes.