Framework for Spectrum Auctions in Canada (sf09970)

August 1998

Framework Summary

  • Any auction will be preceded by a full public consultation, with bidders having the fullest possible knowledge prior to the auction.
  • Consultations on the bandwidth and geographic dimensions of licences will be undertaken prior to any auction. Licence areas will be based on Statistics Canada Census Divisions and Subdivisions.
  • Licensees will be given the maximum possible flexibility in their choice of service offerings and technologies, with limits generally only for interference management purposes.
  • Licensees will be allowed to transfer and subdivide their licences to eligible third parties.
  • Licences will be assigned for an initial 10-year term, with the expectation of renewal for subsequent 10-year terms.
  • The government will continue to possess all sovereign rights necessary to implement any required reallocation at any time, as per section 40 of the Radiocommunication Regulations. Any reallocation would only take place after full consultation.
  • Payment of winning bids will be required in a lump sum amount at the auction's close.
  • Auction results will not be used to recalibrate (up or down) the fees of incumbent licensees with similar spectrum.

Table of Contents

  1. Introduction
  2. The Application of Auctions
  3. Spectrum Release Plan
  4. The Auction Process
  5. Definition of Licences
  6. Licence Attributes
  7. Financial Aspects of Auctions
  8. Auction Design
  9. Treatment of Incumbent Licensees
  10. Conclusions
  11. Appendix

1. Introduction

In February 1996, Industry Canadaannounced its intention to introduce the use of spectrum auctions where relianceon market forces to select licensees is in the public interest. AuctionsFootnote 1 offer a number ofadvantages, such as the ability to promote economically efficient use of spectrum, openness andobjectivity as an assignment mechanism, procedural efficiency, and the ability to returnappropriate compensation to Canadian taxpayers for the use of a public resource.Footnote 2.

The Radiocommunication Act was amended in June 1996 to give theMinister of Industry the explicit authority to use spectrum auctions. In August 1997, Industry Canada initiated a public consultation process on auction implementation issues with the publication of Canada Gazette Notice DGRB-003-97announcing the availability of a document entitled Consultation on Issues Related to Spectrum Auctioning.Footnote 3 Forty-two written responses were received and additional input was gatheredthrough a number of round-table meetings held across Canada in September and October of 1997. The department wishes to express its sincerethanks to all those who took the time to forwardtheir views in written submissions and/or via participation at the round-table discussions.

After reviewing the input receivedand analysing other administrations' spectrum auction experiences, the department is now ina position to outline the general framework that it expects to follow for any specific spectrum auction that may be held in thefuture. All future spectrum auctions will be preceded by a public consultation phase. At that time, views will be sought concerning the need for changes to this general framework. The department's anticipated approaches to the various issues outlined in the consultation paper are laidout in the remainder of this document.

2. The Application of Auctions

There are three broad conditions tobe met in determining whether any particular spectrum authorizationscould be assigned via an auction. Auctions may be used as a spectrum assignment mechanism in any situation:

  • where the demand for spectrum exceeds the available supply;Footnote 4
  • where the government's policy objectives can be fully met through the various means available;Footnote 5 and
  • where the Minister of Industry is confident that reliance on the marketplace to select licensees is in the public interest.

In the recently completed consultation process on auction implementation issues, a number of respondents presented arguments as to why some specific types of licences should not be assigned via an auction. The department has incorporated these comments in determining the instances in which auctions will not be used as an assignment mechanism. These exceptions are outlined below.

2.1 Broadcast spectrum and related applications

Industry Canada will not auctionspectrum allocated to broadcasting services. The issuance of broadcasting licences continues tobe the responsibility of the Canadian Radio-television and Telecommunications Commission(CRTC) under the BroadcastingAct. The Minister of Industry's role in broadcastingextends to spectrum management and the technical aspects of broadcasting,Footnote 6 including determining frequency allotments and issuing technical certificates to broadcastinglicensees selected by the CRTC.

As for spectrum which may be usedfor, among other things, auxiliary broadcasting purposessuch as Studio Transmitter Links (STL) or Electronic News Gathering (ENG), the department is of the view that anauction could be used if the three conditions stated above are met.

2.2 Priority users

Priority users will not have toparticipate in an auction to acquire the frequencies, in bands designated forpriority services, that they require for carrying out their operations. These users include those whose radiocommunicationssystems are vital to national sovereignty and defence, public security and safety, emergencyservices and essential government operations. They will continue toreceive priority access to spectrum.

2.3 Satellite services

Given the current internationalregulatory regime, auctions are not an appropriate spectrum assignment methodology for satellite systems where such systems are global innature or where a significant levelof international coordination is required. However, if the Minister determined it to beappropriate, it would be quite feasible to use auctions to assign spectrum in certain types of "planned" satellite bands such as Direct BroadcastServices (DBS) bands, Footnote 7 where countries have predefined spectrum and orbital slots with recognized rightsinternationally.

3. Spectrum Release Plan

An auction will be most successfulwhen all pertinent information regarding the licences being auctioned is readilyavailable at the beginning of the process. As several respondents in the recent consultation process pointed out, this should include information onspectrum the department plans to release in the future, the timing of its release, and theassignment mechanism.

This information will enableparticipants to more accurately assess the current and future marketplacewhen developing their business plans, and help them prepare a reasonablevaluation for the spectrum in question. By reducing uncertainty, this information will give bidders greater confidence in determining anappropriate strategy.

Therefore, the department intends tocommence the practice of issuing an annual plan that provides as much detail as possible onnew frequency bands that may be opened for licensing. Furthermore, the department willidentify the cases in which it expects first-come first-served licensing to beused and the cases in which a competitive licensing process, either an auctionor a comparative review,will likely be used.

4. The Auction Process

In the consultation paper, thedepartment proposed that any auction would be preceded by a full public consultation. The Minister's policy decisions would then beclearly articulated so that potential bidders have the fullest possible knowledge prior to theauction. Bidders would then be qualifiedto participate in the auction based on their compliance with clear and objectivecriteria. Finally, a remote-access simultaneous multiple round auction wouldcommence.

Respondents were generally supportiveof these proposals, but noted that some issues would be common to all futureauctions. In order to expedite futureauction processes, it was suggested that some issues(licence tenure or transferability, for example) be dealt with in terms of a "common framework" that would apply to all auctions. The department agrees with this suggestion and therefore approaches to these common issues are laid out in theremainder of this document. The department's proposal to allow for"comments on comments" as part of the consultation that would precede each specific auction was also generallysupported.

After considering the input received, the department foresees future spectrum auctions taking placeaccording to the steps outlined below.Footnote 8

  1. A Notice will be published in the Canada Gazette announcing the availability of a consultation paper addressing issues related to the spectrum auction in question. The deadline for receipt of comments and the electronic and/or physical address to which comments should be sent will also be specified in the Gazette Notice. For the "common framework" issues referred to above, comments will be sought as to whether there is any reason to deviate from the approaches laid out in the remainder of this framework document. For other issues that will require a different approach from auction to auction (the geographic and bandwidth definition of licences, for example), specific proposals or options will be put forward for comment.
  2. After the closing date for receipt of comments, copies of all the comments received will be made available to the public through Industry Canada's Web site, Industry Canada libraries and/or a commercial printing and copying service. Respondents will be encouraged to provide their comments in electronic format to facilitate posting on the department's Web site.
  3. A second — shorter — comment period will then be opened during which respondents may comment on the initial comments of others. Again, the submission of comments in electronic format will be strongly encouraged. After the closing date of this second period (which will also have been specified in the original Gazette Notice), these "comments on comments" will also be made available to the public.
  4. After having reviewed all the input received, the Minister of Industry will make the final policy decisions. A second Notice will be published in the Canada Gazette announcing the availability of a paper that describes the licences to be auctioned, the terms and conditions that will be attached to the licences, the reserve price for each licence, the rules of the auction, and the eligibility criteria and application procedures to participate in the auction.Footnote 9 Prospective bidders will also be invited to submit "Notifications of Interest,"Footnote 10 if they so choose. As well, written questions asking for clarification of rules or policies will be accepted. It should be noted that no "confidential" questions will be accepted and that the department's answers to all questions will be made public. The deadlines for receipt of the "Notifications of Interest," written questions, and the auction application materials (including a financial deposit) and the address to which they should be sent will be specified in the second Gazette Notice.
  5. After the deadline for receipt of "Notifications of Interest" and written questions, the "Notifications of Interest" and the department's answers to the questions received will be made public.
  6. Once the deadline for receipt of applications to participate in the auction has passed, all applications received will be reviewed to assess whether or not all eligibility criteria have been satisfied. Those who have submitted acceptable applications will then receive bidder packages (which will include items such as the instructions required to use the department's automated bidding system and the initial bidding schedule), and a listing of which applicants have and have not been qualified as bidders will be made public. Should there be any licences for which only one qualified bidder has applied, that bidder will be immediately offered the licence at the specified reserve price.
  7. Seminars and/or mock auctions may then be held to allow bidders to better familiarize themselves with the bidding system and software.
  8. The auction will then commence and proceed until it ends according to the specified stopping rule. High bidders at the auction's close will be issued their licences provided that their bid amounts are paid in full by the deadline specified in the auction rules. Should any licences remain unassigned after the auction, the department's preferred approach will be to offer them in a subsequent re-auction within a reasonable period of time.

The time required to complete an auction process from the release of the original consultation paper to the assignment of licences will vary somewhat. It will depend on such factors as the complexity of the issues related to any specific auction, the volume of consultation comments received, the number of licences being offered, the number of parties applying to participate in the auction, the number of qualified bidders, and the time required by bidders to prepare their bidding strategies and financing. The department estimates that the elapsed time between the release of the initial consultation paper and the opening of the actual bidding would be roughly six to nine months and that the auction itself would then take anywhere from several days to several weeks to complete with licences finally being issued, at most, two months after bidding has closed.

5. Definition of Licences

The department's suggestion that the appropriate authorization instrument in an auction context would be the spectrum licenceFootnote 11 was supported in the consultation comments received. The bandwidth and geographic dimensions of licences will be addressed in the consultation processthat will precede each individual auction that may be held.

The department's proposal to establish sets of service areas based on Statistics Canada's Census Divisions and Subdivisions was also generally endorsed by respondents. The definition of the service areas within these tiers and accompanying maps and data tables are available on the department's Strategis Web site.Footnote 12 Summary tables are located in the Appendix to this document. In the consultation preceding each auction, the department will ask which tier orwhat mix of tiersFootnote 13 should be used for that particular auction.

To facilitate the electronic storage and representation of these service areas, including the material on the department's publicly accessible Web site, they will be "translated" into areas based on Spectrum Grid cells.Footnote 14 Given that an individual grid cell is only 25 km2 in area, they offer sufficient granularity such that the variations between the borders of the grid-cell defined areas and the underlying Census Divisions and Subdivisions will be minute. In the event that any interference issues must be resolved between two licensees, the boundary as defined by theSpectrum Grid cells will be the one used.

5.1 Boundary conditions

Boundary conditions are intended to divide the spectrum resource into separate spectrum spaces in order to minimize the potential of radio interference between neighbouring licensees. To the potential licensee, they provide indications on the level of radio interference that may be expected from a neighbour as well as on the level of radio interference that may be transmitted to a neighbour. Since the boundary conditions cannot be based on the technical and operational characteristics of all potential systems in a specific frequency band, the department strongly encourages licensees in the same or adjacent geographic areas or frequency blocks to enter into mutually beneficial arrangements that would augment the boundary conditions, allowing both licensees to provide service to the edge of their service areas or to fully use the frequencies at their bandedge. The department will, however,consider the boundary conditions as guidelines if called upon to arbitrate in cases of conflict betweenlicensees.

The department recognizes that thereis no single set of boundary conditions that can be applied to all frequencies and services. A set of boundary conditions for a particular service could include: apower flux density limit at the boundary, antenna height and transmit power limitsnear the boundary, or out-of-band emission limits. Following the suggestion made byrespondents to the consultation paper, the department foresees boundary conditions andradio interference management rules being developed by industry participants — perhaps under the auspices of the Radio Advisory Board of Canada (RABC) — on a case-by-case basis in response to a pre-auction consultation.

In the geographic domain, theboundary conditions should, in general, require that the outbound signalFootnote 15 froma licence area at the boundary fall below a prescribed maximum signal level. There are many aspects to consider inprescribing the maximum signal level at licence area boundariesfor each frequency band or service. Selection of this outbound signal boundary condition must take into account the impact on the varioustechnical and operational characteristics of systems that can be implemented in the frequencyband.

Setting the outbound signal boundaryconditions at the maximum permitted radio interference level into the mostinterference susceptible type of system or equipment that may be implemented in the band allowsfor exclusive and unencumbered operation within a portion of the licence area. However, it also implies a large buffer zoneFootnote 16 straddling the boundary where co-frequency servicecan only be offered subject to coordination with neighbouring licensees thus detracting from theexclusive access.

On the other hand, setting theoutbound signal boundary conditions at the minimum required nominal (i.e. unfaded) signallevelFootnote 17 requires that licensees either reachsome form ofcooperative sharing arrangement or coordinate their service near their sharedboundary. This approach further reduces some of the exclusivity privileges, andincreases the possibility of having onelicensee lock out its neighbour by using all the available frequencies near theboundary, unless the licensees are required to communicate prior to implementation to ensure equal burdensharing.

Optimally, the outbound signalboundary condition should be set at an intermediate value between the maximumpermitted radio interference level and the minimum required nominal signal level. This compromise would preserve most of the exclusivityprivileges while reducing the buffer zone. Exclusive and unencumbered operation would bepossible outsidethe buffer zone but a high level of cooperation or coordination would berequired within thebuffer zone.

Boundary conditions on the inbound signalFootnote 18 couldinclude antenna height, antenna characteristicsand transmit power constraints close to the boundary in order to limit the potential radio interference intoneighbouring spectrum spaces.

In the frequency domain, boundaryconditions will include such measures as out-of-band emission limits andfrequency stability requirements in order that adjacent frequency block operation would not bejeopardized. For general application, it is proposed that such out-of-band emission limitsbe expressed as absolute rather than relative levels. Here again, these boundary conditions will be developed by industry participants beforeeach auction.

6. Licence Attributes

As the department suggested in theconsultation paper and as respondents largely agreed in their comments, the use of a market-oriented mechanism like an auction should be accompaniedby certain changes in the nature of licences as compared to the current practiceof administrative assignment. Understanding exactly what is being auctionedwill be very important for bidders to secure adequatefinancing and to develop a bidding strategy. While upholding the status of radio spectrum as a public natural resource, it is important to provide bidders, andsubsequently licensees, with an attractive package of licence attributes so as to enhancetheir abilities to secure financing, to invest in their networks, and to provide the best possibleservices to Canadian consumers.

6.1 Ministerial authority

Some respondents expressed concernthat the enhancement of licences would jeopardize the future ability of thegovernment to reallocate spectrum to new uses related to meeting obligationsunder an international agreement or to national security concerns. The government will continue to possess all sovereign rights necessary to implementthe required reallocation at any time. Thisis reflected in section 40 of the Radiocommunication Regulations which readsas follows:

40. The assignment of a frequency orfrequencies to a holder of a radio authorization does not confer amonopoly on the use of the frequency or frequencies,nor shall a radio authorization be construed as conferring any right of continuing tenure in respect offrequency or frequencies.

Whetherspectrum is assigned by an auction or by any other mechanism, section 40 will continue to apply. It is important to note that the departmentwould reallocate spectrum assigned through auction only under extraordinarycircumstances — taking into considerationthat the licensee complied with the conditions of licence, has made largeinvestments in infrastructure, and is serving an established client base. If there were a reallocation, it would take place onlyafter full consultation.

6.2 Flexible spectrum use

A key benefit to using auctions isthat they allow market forces to determine who will gain access to spectrum aswell as the uses to which spectrum will be put. To ensure that licensees can continue toquickly and efficiently adapt their service offerings to changing consumer demands, the department will provide licensees with the maximumpossible flexibility indetermining the services they will offer and the technologies they will employ.Beyond the need toconform to the applicable Canadian spectrum allocation, only those limitations required for interference management purposes will generally beimposed.

6.3 Transferability of licences

In order to facilitate the adaptationof spectrum use to changing marketplace conditions, the department proposed in the consultation paper to make licences transferablewith a minimum of regulatory oversight and administrative work. Even if an auction works perfectly in generatingan efficient initial assignment of licences, circumstances can change over time so that firms and consumerswould benefit from provisions that allow licences to migrate to other userswith new and more innovative service offerings or more efficient technologies. By allowing licences to bebought and sold after an auction, a firm with a more valuable new use of the spectrum can negotiate a transfer with theincumbent licensee thatis beneficial not only to both parties, but also to consumers.

Overall, the response to this proposalwas quite positive. Some also arguedthat transferabilityrights should be enhanced for all licences, including those that are assigned administratively. The department agrees that there is potentialfor an improvement in the efficiencyof spectrum use if all spectrum users face a similar set of market-orientedrules regarding licence transfers, and will investigate further the possibleenhancement of rights forlicensees who acquired spectrum through administrative means.

Auctioned licences will be transferablesubject to the following conditions and guidelines.Footnote 19

  • All eligibility criteria and licence conditions that apply to a licence, including those related to interference management, will continue to apply should the licence be transferred.
  • Should an auction winner transfer its licence to another party, for example, four years into a 10-year licence term, the second party will only receive a licence term equal to the remaining six years, but will be eligible for the same licence renewal provisions as the original licensee.
  • All proposed licence transfers must comply with any spectrum aggregation limit or other measures intended to preclude anti-competitive behaviour that may be in place.Footnote 20
  • Written notification will be required of all proposed licence transfers. The department will also request attestations or other documentation to ensure that the points above (e.g. compliance with the eligibility criteria) have been satisfactorily addressed. Once a licence transfer has been registered, the department will revoke the original licence and issue a new licence in its place.
  • The department will maintain a publicly accessible data base listing all auctioned licences and the respective licensee. The data base will be updated upon a licence transfer.

6.4 Divisibility

The department also proposed thatlicensees be permitted to transfer their licences not only in whole, but alsoin part; that is to say, licences should be divisible in both the bandwidth and geographic dimensions. This policy will serve many functions. First, it will encourage competition by removing potentialentry barriers to certain competitors such as small businesses that may not have been successful in a past auction. Second, it will encourage more efficient spectrum use bypermitting the deployment of a broader mix of service offerings. Third, it will speed serviceto unserved or underserved areas.

All respondents who provided anopinion on this issue agreed with the department's proposalto allow the divisibility of licences. Some respondents saw no reason to impose any limits on such divisibility. Others argued that there must be somerestrictions in order to prevent interference problems and to ensure thatlicensees can operate efficiently. Such limits could be defined as a percentageof the bandwidth to be auctioned in the bandwidth dimension. In the geographicdimension, it was suggested that divisibility could perhaps be limited by Census Divisions orSubdivisions.

Given the greater reliance on market forces inherent in the use of auctions, thedepartment is not convinced of theneed to impose significant limitations on licence divisibility. There is no reason to assumethat the parties involved in the division of a licence would not both be interested inminimizing interference and maximizing the reliability of the services they will provide. In order to maintain compatibility with thedepartment's data base, licences will be divisible in thegeographic dimension only in terms of Spectrum Grid cells. Thus when an auctioned licence is divided, the minimum geographic size that any oneof the new divisions may take isone Spectrum Grid cell. As discussed inSection 5 of this document, the individual Spectrum Grid cells are sufficiently small that even with thisrestriction, an extremelyhigh degree of flexibility will be available to the parties involved indetermining the size andshape of subdivided portions of a licence.

As for the bandwidth dimension, thedepartment will not generally restrict the amount of spectrum that can bedisaggregated. However, the departmentwill require compliance withemission limitations in the frequency bands immediately outside and adjacent toeach of the resultingfrequency blocks, and with the spectrum assignment plan as defined in the applicable Standard Radio System Plan (SRSP).

In any situation, where there is arequest for the transfer of a portion of a licence, the originallicensee will be required to return its licence to the department. Once the transfer has been registered, thedepartment can amend the original licence and issue a new licence to the transferee.

6.5 Length of licence term and renewal mechanism

In exchange for the market-basedpayments that auctions will generate, licensees will expect that their licence terms besufficiently long to ensure that they can obtain adequate returns on theirinvestments. This message was clearly articulated in the responses to the consultation paper. In that document,the department proposed a length of term in the range of 10 to 20 years,which is a significant increase in comparison with the current practice. On the question of renewal, the department asked for comments concerningwhether licensees should have an expectation of renewal or whether the spectrumshould be re-auctioned atthe end of the term.

Most respondents favoured a longlicence term of 15 to 20 years (two respondents proposed a 99-year licence term) witha high expectation of renewal, while adamantly rejecting the idea ofre-auctioning. Respondents arguedagainst the re-auctioning of licences on the basis that, onceconstructed, a radio-system is practically inseparable from the spectrum ituses. Therefore, re-auctioning canpotentially disrupt the service and strand the investments of both the companyand the end users. This, in turn, wouldlead to uncertainty and underinvestment, especially towards the end of the term.Furthermore, they argued that any renewal fees for the previously auctionedlicences should be limited to the administrative costs of spectrum management.

Having reviewed the input received,the department intends to auction licences with a 10-year term and a highexpectation of renewal at the end of the term. That is to say, the department willgenerally renew auctioned licences for subsequent 10-year terms unless a breach of licence condition occurs, a fundamental reallocation of spectrum to anew service is required (e.g. a reallocation by the International Telecommunication Union),or an overriding policy need arises (e.g. a spectrum reallocation to address anational security issue). To provide a more stableinvestment climate for licensees, a consultation process would commence no later than two years prior to the end of the licence term(i.e. after year eight) if the department foresaw the possibility that a licence would not berenewed. The imposition of any renewal fees and/or amendments to licence conditions for theinitial licensees in the subsequent term would also be addressed in a consultation process thatwould commence no later than two years prior to the end of the licence term.

In the event of bankruptcy or insolvency of a licence holder, the status and treatment of thelicence will be subject to the general laws of bankruptcy and insolvency.

6.6 Service roll-out requirements

Service roll-out requirements generally stipulate that a licensee provide service to a certainpercentage of the population in its licence area within a specified time frame. Under thecomparative evaluation process, licence winners are often held accountable by condition oflicence to a specified timetable for service delivery. In an auction scenario, roll-outrequirements could be imposed in order to prevent a licensee from warehousing spectrumfor the purpose of preventing the entry of other service providers.

Some respondents to the consultation paper argued that there was a need for roll-outrequirements based on a concern that bigger, better established participants might use anauction to prevent competition by acquiring and warehousing spectrum. Others, however,noted that as a condition of licence it can be very difficult to enforce as licensees may oftenhave very legitimate reasons (such as changes in the marketplace, equipment availability)for not being able to comply with the original timetable.

The department has come to the conclusion that in an auction framework, with awell-functioning secondary market, roll-out conditions will likely not be required toaddress competition issues. Concerns regarding anti-competitive spectrum warehousingcan be addressed through other means such as setting appropriate market sizes andemploying spectrum aggregation limit and/or bidder eligibility restrictions where required.Moreover, investors would be very reluctant to finance a winning bid where there wouldnot be any return on investment.

Should there appear to be a need to impose roll-out conditions to advance other policyobjectives, proposals will be made in the pre-auction consultation paper and the final policydecision will be clearly stipulated prior to the auction's commencement.

7. Financial Aspects of Auctions

7.1 Pre-auction deposits

The department sought comment in the consultation paper on whether prospective biddersshould submit a pre-auction deposit. It was proposed that the deposit for each biddershould be generally related to the size of the population located within the geographic areasof the licences that bidder is interested in winning.

Respondents generally agreed on the need for a pre-auction deposit to ensure the financialviability and sincerity of the participants. They also agreed that the deposit should be basedon a measure reflecting the potential market size of the licence.

The department will require that a pre-auction deposit, likely in the form of an irrevocableletter of credit, be submitted in order to participate in the auction. The required deposit foreach bidder will be linked to the population and bandwidth associated with the licence orlicences on which that bidder wishes to bid.Footnote 21

For licence winners, the deposit will be credited toward payment of their winning bids. Forunsuccessful participants, the deposit will be refunded less any penalties.Footnote 22 they haveincurred. If the penalties exceed the deposit, any outstanding amount will be owed to theCrown.

The pre-auction deposit will be returned to any applicant that is found not to be a qualifiedbidder, to any applicant that provides written notification to the department of itswithdrawal from the process prior to the auction's commencement, and to any bidderwhose bidder eligibility points are reduced to zero during the auction and who is notpotentially liable for any withdrawal penalties.

7.2 Reserve prices

Industry Canada has always operated on the principle that all spectrum users shouldcontribute to covering the cost of spectrum management in Canada. This can beaccomplished within the auction process by establishing reserve prices at a level that takesinto account the cost of managing the spectrum in question for the whole term of thelicence. In practice, it is admittedly difficult to come up with a precise long-run estimationof the cost of spectrum management attributable to any given spectrum band. Nonetheless,this will be the conceptual model that the department will follow in establishing what itexpects will be quite modest reserve prices. The department sees no benefit in establishinghigh reserve prices that might dissuade legitimate service providers from establishingsystems and serving consumers. Furthermore, where the value of a licence is high, the department is confident that the bidding activity will result in an appropriate and fair returnbeing generated for Canadian taxpayers.

Once an estimated long-run spectrum management cost figure has been determined for a band that is to be auctioned, that amount will be distributed over the individual licences to be auctioned in proportion to the "points".Footnote 23 associated with each licence to determine its reserve price. Similarly, the dollar per point figure that can be derived by dividing the total estimated long-run spectrum management cost figure by the total of the points associated with all licences up for auction will be used to determine the value of thepre-auction deposits referred to above.

7.3 Bid payment

In the consultation paper, thedepartment proposed that winning bidders would pay 25 percent of the amount of theirbids at the auction's close with the remaining 75 percent to be paid in annual instalments over the term of the licence. It was felt that such an instalment payment schememight aid smaller players who could have greater difficulty raising capital.

The majority of those who addressedthis issue, in the response to the consultation paper, strongly rejected theuse of instalment payments. Respondentsremarked that the role of lender should be left with the financial markets andnot with the government. As well, they pointed to the problems that have ensuedfrom the PCS C-block auction in the United States where the FederalCommunications Commission (FCC) used an instalment payment scheme. In particular, they noted that the instalmentpayment scheme resulted in speculative bidding,inefficient assignment of licences, artificially inflated bid prices, bid payment defaults, and delayed roll-outof services to consumers.

The evidence and arguments presentedby respondents show that instalment payment plans are largely detrimental tothe auction process and do not serve to aid smaller players — indeed the artificial inflation of bidprices harms the legitimate small players that one might hope to aid through the use ofinstalment payments. As such, thedepartment will not allow the payment of bidsin annual instalments but rather will require that winning bids be paid in full shortly after the closeof an auction.

More precisely, winning bidders willbe required to submit 20 percent of their high bids within 10 business days of theauction's close. This payment will benon-refundable. If the winning bidder fails tomake this initial payment in a timely manner then the licence will not be issued and the bidderwill be subject to the applicable forfeiture penalty.Footnote 24 The remaining 80 percent will be due within 45 business days of the auction's close. Failure by the winning bidder to make this final payment in a timely fashion will alsoresult in the licence not being issued and again the bidder will be subject to the applicableforfeiture penalty.

It isalso important to note that beyond the payment of the winning bid, no otherlicence fees or payments will be required for the duration of the licence term.Footnote 25

8. Auction Design

In the consultation paper, thedepartment proposed the use of simultaneous multiple round auctions. The rules for the simultaneous multiple roundauction call for a related set of licences to be offered for sale at the same time. Bidding is organized into a series of rounds. At the beginning of each round, bidders are provided with information that includesthe standing high bids on each licence andinformation about the bidder's own eligibility for bidding. New bids for a licence are requiredto exceed the standing high bid by at least some pre-established increment. In each round bidders are offered an opportunity to withdraw bids submitted inprevious rounds, subject to apenalty. A minimum pace of bidding in theauction is established by the "activity rule," which penalizes bidders who are inactive by reducing their "biddereligibility points." The rounds continue untilthere are no new bids on any licence. Details of the auction format are discussed below.

Auctions would be run electronicallyand bidders would be able to participate remotely from their offices. The simultaneous multiple round auctionremains at the forefront of applied auction theory and has been usedsuccessfully by a number of diverse administrations around the world. Respondents to the consultationpaper were generally supportive of the use of this auction design.

The department therefore expects touse the simultaneous multiple round format for future spectrum auctions. As discussed furtherbelow, both the theoretical and practical aspects of auction design continue toadvance rapidly. The department willcontinue to examine new auction design developments and adopt them as appropriate. It is also important to remember that thedesign of any specific auction will be subject to public consultation prior toits actual commencement. Thus potentialbidders will have an opportunity to comment on any design changes that the department maypropose.

Giventhe complexity of the simultaneous multiple round auction format, thedepartment may hold information seminars and/or mock auctions prior to any realauction to allow bidders to better familiarize themselves with the bidding system and software.

The detailed elements that have nowbecome largely standard in simultaneous multiple round auctionsconducted around the world were discussed in the consultation paper. As proposed at that time, the department expects that futuresimultaneous multiple round auctions will feature the attributes discussed below.

8.1 Bidder eligibility points

Each licence available in an auctionwill be assigned a number of points approximately proportionate to thebandwidth and population covered by that licence. As part of the application package toparticipate in the auction, each prospective bidder will be asked to indicate which licences it may want to bid on during the course of the auctionand to indicate the total number of "points-worth" of licences that it may wish to bidon in any round.Footnote 26 This number, which will also determine the pre-auction deposit requiredfrom the bidder (i.e. therequired deposit will be calculated on a dollar-per-point basis), will define that bidder's initiallevel of "bidder eligibility points." The purpose of this information is to assist in thedevelopment of activity rules (discussed in more detail below) that are used tohasten the speed of theauction.

8.2 Activity rule

Before the auction, each bidder mustspecify which licences it wishes to bid on (as per the discussion on biddereligibility points above). A bidder isdefined to be active on a particular licence in a given round if either it has the standing high bid fromthe previous round or if it submitsan acceptable bid in that current round. There are multiple stages — often three — each containing an unspecified number of bidding rounds. In the first stage bidders must be active on licences whose corresponding points add up to acertain percentage of thebidder's eligibility point level (for example, one-half); in the second stage the percentage isincreased (perhaps to three-quarters); and in the final stage bidders must be active on 100 percentof their bidder eligibility point levels. If a bidder falls short of the required activity level, the bidder's eligibility point level shrinksproportionately. An auction begins and continues in stage one until bidding activity declines to anunacceptable level (say, threeconsecutive rounds in which new bids are placed on 10 percent or less of the licences available). At this point,the auction can move to stage two — andsimilarly to stage three later inthe auction.

8.3 Bid withdrawals and related penalties

In the event that a bidder makes abid that it later wants to change, that bidder will be given the opportunity to withdraw it. Toencourage meaningful bids, however, a bid withdrawal penalty needs to beimposed. It is natural to have thispenalty correspond to the potential loss in revenue causedby the withdrawn bid. If the licence forwhich the bid has been withdrawn ends up selling for more than the withdrawn bid, then no penalty willbe charged to the bidder. If the licenceultimately sells for less than the withdrawn bid, then the penalty will be thedifference between the withdrawn bid and the eventual final selling price. As a measure to reduce the overall time ofthe auction, while not compromising the auction's efficiency, the department will allow bidders to place new bidsand/or withdraw previously submitted bids at the same time during a round, as opposed to havingtwo distinct phases — one for bid submission and one for bid withdrawal — during each round.

8.4 Bid increments

Bid increments, like activity rules,are necessary to help hasten the auction's progress. For a bid to be acceptable it must be larger than the current standing high bid bythe bid increment.Footnote 27 Increments will be set in percentage terms (x percent of the standinghigh bid) and/or in absolutedollar amounts. Bid increments will bechanged during the course of the auction. For example, at the beginning of an auctionwhen bidding activity is likely to be high, bid increments will be relatively large. As the pace of the bidding falls below a certain threshold, bidincrements will be reduced. The rulesfor changing bid increments will be laid out with a fairlyhigh degree of precision prior to the auction. However, to ensure the auction closes in areasonable amount of time, there will be flexibility to "override" the rules regarding bid increments. Allbidders will be given prior notice well in advance of any proposed changes to the size of thebid increments.

8.5 Waivers

Waivers are designed to prevent abidder from losing bidder eligibility points when it does not satisfy the activity requirementsin a given bidding stage. The purpose ofwaivers is to protect bidders against possible mistakes they might make duringthe course of an auction orto allow them to maintain bidder eligibility point levels in the case oftechnical or communication problems. Typically, eachbidder will be given five waivers.

8.6 Stopping rule

An auction will close when a roundgoes by without any acceptable bids or waivers having been submitted on anylicences. In exceptional circumstances, and after all participantshave been notified inadvance, any round can be declared as the final round. Similarly, exceptionalcircumstances, such as a natural disaster, may result in an auction being delayed, suspended orcancelled.

8.7 Bid forfeiture and related penalties

After the conclusion of the auction,any bidder who has submitted the high bid on a licence but fails to comply with the specifiedpayment schedule will forfeit its right to have the licence issued toit. Furthermore, the bidder will berequired to pay a penalty in the amount of the difference between the forfeited bid and theeventual selling price of the licence (in a subsequent re-auction), if the re-auction price is lowerthan the forfeited bid. In addition, anamount equal to 3 percent of the original forfeited bid will be charged toaccount for the administrativeexpenses incurred to reassign the licence.

8.8 Discretionary versus non-discretionary bidding

The consultation paper proposed theuse of non-discretionary bidding. Whatthis means is that rather than beingoffered the opportunity to enter any amount that exceeds the standing high bid by atleast some minimum bid increment, bidders would instead have the choice of giving eithera "Yes" or "No" response as to whether they wish to bid an exact amount equal to the standing high bid plus a predetermined bid increment. Non-discretionary bidding has a number of potential advantages, as outlined below.

  • It drastically simplifies submission of bids, eliminating the errors that sometimes occur when a bidder must fill dozens (or even hundreds) of boxes with potentially quite large numbers.
  • It allows rounds to be more brief and more frequent, both because the mechanics of entering and checking bids are simpler and because the prices, which never jumpFootnote 28 in the revised design, are more predictable. This also reduces the need for frequent executive oversight during the bidding, saving costs for the bidders.
  • It removes opportunities for bidders to send potentially collusive messages through the trailing digits of their bid amounts.

Relatively few comments were receivedon the issue of discretionary versus non-discretionarybidding and differing views were expressed by those who did specifically address this issue. Concerns about the use of non-discretionarybidding focused primarily on the proposed time-stamp tie-breaking rule.Footnote 29 Some respondents felt that a time-stamp tie-breaking rule might favour thosebidders who, for example, had the fastest computers.Footnote 30 There is also the possibility thatnon-discretionary bidding with a time-stamp tie-breaking rule could be moresusceptible to certain types of collusive behaviour.

Since the release of the consultation paper, new developments in auction theory and design have occurred and the United States Federal Communications Commission has completed both an auction featuring non-discretionary biddingFootnote 31 and an auction featuring "multiple increment bidding.Footnote 32 The multiple increment bidding format is a variation on the non-discretionary bidding format, which allows bidders to increase high bids by up to, in the case of the LMDS auction, nineincrements.

The multiple increment bidding formatwould appear to preserve the previously mentioned benefits ofnon-discretionary bidding while at the same time reducing the incidence of tie bids and any possible related problems. Multiple increment bidding should also lead to the faster conclusion of an auction than would single-increment non-discretionarybidding. The department is investigating the use of multiple increment bidding and willpropose its use should it appear tobe the optimal design option. Again, itis important to remember that the design of any particular auction will be the subject of publicconsultation before that auction'scommencement.

8.9 Bidder identities

Several respondents offered commentson the advisability of concealing bidder identities during an auction. While there could be some benefit toconcealing bidder identities in order to deter bidcollusion, the department is of the opinion that only under rare circumstances would thesebenefits outweigh the benefits of full information disclosure to bidders. Therefore, thedepartment expects that for most auctions the identities of all bidders, the licences onwhich they are qualified to bid, and their initial eligibility point levels will be made public prior to the commencement of bidding. As well, full information on the bids placed by all bidders will be made available after each round.

9. Treatment of Incumbent Licensees

Theconsultation paper asked whether the results of future spectrum auctions shouldbe used to adjust thelicence fees of incumbent licensees with similar spectrum.

A significant majority of respondentsadvised that in no circumstances should the department adjust existing licence fees based on auction results. There were several reasons cited. First of all, those bidding forlicences will already have taken into account the existing fees of incumbents with whom they maycompete when they are determining their valuations. If these fees themselves are uncertain, this creates unnecessary complications for the propervaluation of auctioned licences. Second,recalibration implies the retroactive application of today's valuations to licences awarded in the past. This is regarded as unwarranted and unfair because the current fee structure is based on legitimate good faith arrangements madewith the government at the time of initial licensing. Third, one should take into account risks incurred and investments made byincumbents. Uncertainty created by recalibration damages established businesses because they made plans and secured financing under the rules of theday. Finally, readjusting fees basedon future auction prices will create large uncertainties in the wireless sector. These uncertainties would have a major impacton the availability of financing, investment in newtechnologies, and the provision of new services.

Some respondents suggested that thedepartment "grandfather" existing spectrum users and grant them the same rights that wouldbe awarded to those who receive their licences via an auctionprocess. One of the immediate concernsassociated with such adjustment is the potential for an unjustified windfall gain. This might be particularly evident in thecase where incumbents havebeen granted access to spectrum but have not used it and not paid fees for it,or where a nominal feehas been paid, but the spectrum is still not in use.

The department finds the argumentspresented against fee recalibration compelling and agrees that incumbents'licence fees should not be tied to auction results for all the reasons cited. However, the department still feels there is a need to discuss how incumbentoperators will be dealt with in an auction scenario. Progression towards the establishment of ahomogeneous regime withrespect to licensee rights will be required for the creation of a fullyfunctioning secondary market forspectrum. The department intends todiscuss possible adjustments to licence definitions,terms, conditions and fees for incumbent licensees in another consultation process. In particular, these issues will be addressedin the framework of transition of existing users from apparatus-based to spectrum-based licences.

10. Conclusions

  • Any auction will be preceded by a full public consultation. Subsequent policy decisions will then be clearly articulated so that potential bidders will have the fullest possible knowledge prior to the auction. Bidders will be qualified to participate in the auction based on their compliance with clear and objective criteria, and a remote-access simultaneous multiple round auction will then commence.
  • Consultations on the bandwidth and geographic dimensions of licences will be undertaken prior to any auction. Varying sized tiers of subnational licence areas will be based on groupings of Statistics Canada Census Divisions and Subdivisions. In the specific consultation process held before any particular auction, comments will be sought as to which tier or tiers (national, regional, local) should be used.
  • Licensees will be given the maximum possible flexibility in their choice of service offerings and technologies. Limits will generally only be imposed for interference management purposes.
  • Licensees will be allowed, by condition of licence, to transfer and subdivide their licences (along with all attendant conditions and obligations) to third parties who meet the applicable eligibility criteria.
  • Licences will be assigned for an initial 10-year term. Licensees can generally expect to have their licences renewed for subsequent 10-year terms unless a breach of licence condition occurs, a fundamental reallocation of spectrum to a new service is required (e.g. an International Telecommunication Union reallocation), or an overriding policy need arises (e.g. a spectrum reallocation to address a national security issue). To provide a more stable investment climate for licensees, a consultation process would commence no later than two years prior to the end of the licence term (i.e. after year eight). This would address any possibilities that a licence would not be renewed, as well as the imposition of any renewal fees and/or amendments to licence conditions for the initial licensees in the subsequent term.
  • The government will continue to possess all sovereign rights necessary to implement the required reallocation at any time, as per section 40 of the Radiocommunication Regulations, in case an overriding necessity to reallocate spectrum arises within the term of a licence. It is important to note that the department would reallocate spectrum assigned through auction only under extraordinary circumstances — taking into consideration that the licensee complied with the conditions of licence, has made large investments in infrastructure, and is serving an established client base. If there were a reallocation, it would take place only after full consultation.
  • Payment of winning bids will be required in a lump sum amount at the auction's close. Modest reserve prices will be related to long-run spectrum management costs. Pre-auction deposits will be required to ensure the integrity of bidders.
  • Auction results will not be used to recalibrate (up or down) the fees of incumbent licensees with similar spectrum.
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