Before the
                FEDERAL COMMUNICATIONS COMMISSION
                     Washington, D.C.  20554


                                   
In the Matter of                   )
                                   ) 
Implementation of Section 309(j)   ) 
of the Communications Act          )    PP Docket No. 93-253
Competitive Bidding                ) 



                         COMMENTS OF THE
   NATIONAL TELECOMMUNICATIONS AND INFORMATION ADMINISTRATION


Larry Irving                       Alden F. Abbott
Assistant Secretary for            Chief Counsel
 Communications and Information

Thomas J. Sugrue                   Phyllis Hartsock              
Deputy Assistant Secretary for     Deputy Chief Counsel
 Communications and Information  

Michele C. Farquhar
Chief of Staff

William F. Maher                   
Associate Administrator    

Mark M. Bykowsky
Robert Cull
Joseph L. Gattuso
Carol E. Mattey
Office of Policy Analysis
 and Development



                                   National Telecommunications
                                   and Information Administration
                    
U.S. Department of Commerce
Room 4713
14th and Constitution Ave., N.W.
Washington, D.C.  20230
(202) 482-1816

November 10, 1993

                            SUMMARY

     In its Notice, the Commission stresses the importance of
adopting a competitive bidding system that is easy to administer
and that minimizes costs to applicants and the Commission.  NTIA
agrees that these are important considerations.  It is equally
important, as the Commission recognizes, however, to choose a
system that best serves the statutory objectives of ensuring an
efficient allocation of licenses, recovery for taxpayers of the
economic value of the spectrum resource, and economic opportunity
for a broad range of applicants.  Only then will the public
realize the full benefits of this new and innovative regulatory
approach.

     Because of the need to develop workable procedures for the
award of licenses for broadband personal communications services
(PCS) in the next six months, NTIA focuses its analysis on issues
relating to the use of competitive bidding for broadband PCS. 
The Commission has tried to grapple with the complexities of the
PCS licensing scheme by proposing to allow bidding on both
individual PCS licenses as well as specified groups of PCS
licenses.  However, the Commission's proposal does not adequately
capture the "value interdependencies" that exist among licenses
in adjacent geographic areas and among spectrum blocks in
specific locations.  

     NTIA therefore proposes that the Commission adopt an
iterative combinatorial auction mechanism for PCS licenses that
would be conducted electronically, using a computer and terminals
for the bidding process.  This "electronic iterative
combinatorial auction" (EICA), which is comparable to an English
auction for various combinations of licenses, is a simpler and
faster way to meet the statutory goals of competitive bidding. 
While NTIA recognizes that it will take some effort to implement
the specific procedures necessary to conduct an EICA, we believe
that this proposal could be implemented within the mandatory
deadlines and would best ensure the rapid deployment of PCS
technology for the benefit of the public.

     NTIA also discusses the use of reserve prices and royalty
payments to prevent the award of licenses for trivial amounts. 
NTIA prefers the use of royalties for such purposes.

     We also consider the special treatment to be afforded to
small businesses, rural telephone companies, and businesses owned
by minorities and women, which the Commission calls "designated
entities."  We agree that access to capital is one of the most
important determinants of full participation in the
communications field, and that measures, such as reserving
spectrum blocks for bidding by designated entities, should be
adopted to promote greater economic opportunity for these
statutorily designated groups.
                        
                         TABLE OF CONTENTS

SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . .  i

I.   INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . .  1

II.  AUCTION DESIGN. . . . . . . . . . . . . . . . . . . . . .  5
     A.   Key Characteristics of PCS Licenses. . . . . . . . .  5
     B.   The Commission's Proposal. . . . . . . . . . . . . .  8
     C.   NTIA's Proposal. . . . . . . . . . . . . . . . . . . 14
     D.   Bidding Competition. . . . . . . . . . . . . . . . . 22

III. TREATMENT OF DESIGNATED ENTITIES. . . . . . . . . . . . . 25

IV.  CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . 29



                           Before the
                FEDERAL COMMUNICATIONS COMMISSION
                     Washington, D.C.  20554

                                   
In the Matter of                   )
                                   ) 
Implementation of Section 309(j)   ) 
of the Communications Act          )    PP Docket No. 93-253
Competitive Bidding                ) 

                         COMMENTS OF THE
   NATIONAL TELECOMMUNICATIONS AND INFORMATION ADMINISTRATION

     The National Telecommunications and Information Admin-
istration (NTIA), as the executive branch agency principally
responsible for the development and presentation of domestic and
international telecommunications and information policy, and for
management of federal use of the radio frequency spectrum,
respectfully submits the following comments in response to the
Commission's Notice of Proposed Rulemaking in the above-captioned
proceeding.[1]
     
I.   INTRODUCTION

     The Notice presents a historic opportunity for the Federal
Communications Commission (Commission) -- the chance to design a
competitive bidding mechanism for the assignment of spectrum
licenses in the United States that will represent a significant
improvement over the way licenses have been awarded up until now. 
We commend the Commission on its framing of the issues in this
complex and difficult proceeding, and recognize that it faces a
monumental task in adopting competitive bidding procedures within
the deadline mandated under the Omnibus Budget Reconciliation Act
of 1993 (Budget Act).[2]  

     The Commission seeks comment on the appropriateness of
various specific auction procedures under the Budget Act.  It
also considers in some depth such matters as application
processing requirements, up-front payments, deposits, procedures
to be followed to resolve qualification issues, and many others. 
The Commission then discusses how its proposed procedures could
be applied to three specific services -- personal communications
services (PCS), private radio services, and common carrier radio
services.  

     The Commission's careful and thorough consideration of the
numerous issues relating to application, bidding, and licensing
requirements resolves many questions that must be addressed
before competitive bidding can become a reality.  While
recognizing the importance of properly designing auction rules
for private radio and common carrier services generally, and of
specific application requirements for all the services, NTIA
focuses its discussion in this pleading on issues relating to the
design of auctions for broadband PCS licenses in the 2 GHz region
of spectrum.[3]  The characteristics of the particular type of
license being awarded by competitive bidding will have a
significant impact on the performance of various alternative
auction methods.  Because the Commission is statutorily required
to begin assigning PCS licenses by May 7, 1994,[4] it is
essential that it focus first on selecting the appropriate
auction form for that process.[5]

     The Budget Act mandates that the Commission adopt a system
of competitive bidding that serves a number of distinct
objectives: to facilitate the rapid deployment of new
technologies; to ensure that licenses are awarded to a wide
variety of applicants, including small businesses, rural
telephone companies, and businesses owned by minorities and
women; to recover for the public a portion of the value of
spectrum and avoid unjust enrichment through the methods employed
to award licenses; and to ensure efficient use of spectrum.[6] 
In the discussion below, and as considered in the accompanying
staff paper,[7] we first discuss those characteristics of PCS
licenses that we believe will have a critical impact on the
performance of various auction alternatives, followed by a
description of the Commission's auction proposal.  We then set
forth NTIA's proposal, an electronic auction form, that we
believe will better serve the statutorily mandated objectives.[8] 
The use of an electronic auction mechanism is both practical (as
discussed below) and consistent with the Administration's recent
initiatives to reinvent government[9] and to promote development
of a National Information Infrastructure.[10]  We follow with our
views on the ramifications of limited competition in the bidding
for PCS licenses.  Finally, we discuss how the Commission's
proposals will provide economic opportunity for a wide variety of
applicants.

II.  AUCTION DESIGN

     A.   Key Characteristics of PCS Licenses

     There are two characteristics of PCS licenses that will have
a significant impact on whether the Commission's proposed auction
form will meet the Budget Act's objectives: the licenses will
have different market values, reflecting varying economic and
technical characteristics among the bands and geographic areas
covered by the licenses; and the licenses will be "value
interdependent."  

     First, PCS licenses will be heterogeneous commodities.  The
value of each license will depend on its unique attributes.  In
particular, the value of PCS licenses will vary significantly
across different geographic areas, as the potential demand for
this service will depend upon population density, transportation
and employment patterns, and other socio-demographic factors. 
Thus, for instance, the value of a PCS license in a major city
will almost certainly be higher than a license covering a rural
area.  Moreover, licenses in channel blocks A and B presumably
will also be more valuable because they will cover a larger
geographic area, based on Major Trading Areas (MTAs), instead of
Basic Trading Areas (BTAs).[11]

     The value of PCS licenses also will vary within each
geographic area because of the differing amount of spectrum
associated with each channel block.  The value of each of the 30
MHz licenses for channel blocks A and B presumably will be
greater than the 20 MHz license in channel block C or the 10 MHz
licenses in channel blocks D, E, F, or G, even after accounting
for differences in the sizes of the geographic areas covered. 
For instance, it is likely that licensees in the larger channel
blocks will be able to offer a more comprehensive form of PCS
service because of the larger spectrum allocation, or will be
able to serve a greater number of customers.  

     Another factor that will cause the value of PCS licenses to
differ is the presence of varying numbers of incumbent fixed
microwave users in the PCS spectrum blocks to be assigned.  These
incumbent users, which potentially could interfere with PCS
operations, are distributed unevenly throughout the United States
and within PCS license areas.  As a consequence, the value of 
licenses with equivalent amounts of bandwidth will vary both
within and across geographic areas.

     Second, PCS licenses will exhibit "value interdependencies"
-- that is, the value a party places on a particular license will
depend in part on what other licenses it acquires.  For many
foreseeable forms of PCS, users will likely want to maintain
service while traveling from one license area to another.  A
prospective bidder will likely value geographically adjacent PCS
licenses more highly than it would value the same number of
licenses scattered widely across the country, because with
adjacent licenses it can offer a more comprehensive service that
matches more closely the frequent travel patterns of many of its
customers.[12]  Similarly, interdependencies may exist among the
spectrum blocks being licensed in any geographic area.  Such
interdependencies may arise, for example, if PCS providers find
that they need more than a single spectrum license to offer
service in a given area.[13]
  
     These two characteristics of PCS licenses, taken together,
present the Commission with a major challenge.  PCS licenses will
not be homogeneous commodities of uniform value, so there must be
a mechanism that allows bidders to express their preferences for
specific licenses.  At the same time, bidders should have the
ability to obtain groups of licenses through a combinatorial
process so as to realize their interdependent value.  A critical
objective, therefore, is to craft an auction scheme that allows
parties to obtain groups of heterogeneous licenses in an
administratively practical manner, which will speed the
deployment of PCS.

     B.   The Commission's Proposal

     The Commission expresses a preference for ascending oral
(English) bidding over sealed bidding as its "basic" auction
mechanism, at least in part because an English auction
efficiently provides bidders with information about each other's
valuations.[14]  It seeks comment on these bid forms as well as a
variant of the ascending oral auction -- electronic bidding.[15] 


     For broadband PCS licenses in particular, the Commission
proposes a hybrid "sealed-oral" combinatorial auction as a way to
determine whether parties value licenses more individually or in
groups.  Under this proposal, the Commission would accept sealed
bids for a predetermined group of licenses (all MTAs in the
country[16] and, potentially, all BTAs within an MTA[17]), and
then would conduct oral auctions sequentially for the individual
licenses within that group in descending order of population.[18] 
The sealed bids would not be opened until after the completion of
oral bidding.  The licenses would be awarded as a group if the
sealed bid for the group exceeded the sum of the oral bids for
the individual licenses, and otherwise would be awarded
individually.[19]  The Commission thus seeks to facilitate the
efficient aggregation of licenses across geographic regions.  The
Commission also requests comment on whether to allow such
combinatorial bidding to aggregate 10 MHz PCS licenses into 20
MHz or 30 MHz blocks,[20] and the sequence in which it should
auction PCS licenses across spectrum blocks.[21]

     NTIA agrees with the Commission that a form of combinatorial
auction should be used to facilitate the aggregation of licenses,
both across geographic regions and among different spectrum
blocks in the same region.  As set forth in the attached staff
paper, however, we believe that the Commission should employ a
variant of this approach to overcome the problems with certain
aspects of its proposed combinatorial auction.[22]

     First, the Commission should give bidders greater
flexibility to combine licenses during the auction.  The
Commission's proposal artificially limits the permissible
combinations on which a party can bid.  In particular, the only
group of licenses that a bidder could acquire in the proposed
auction process would be all the MTAs within the United States
(the equivalent of a nationwide license), or potentially, the
entire set of BTAs within a given MTA.  The proposal does not go
far enough in allowing bidders to satisfy their demand for
particular groups of PCS licenses.  Because of the limited
grouping contemplated in the Notice, licenses are likely to be
awarded to parties that do not value them the highest, which is
inefficient.[23]  As a consequence, there will likely be
extensive transactions in licenses after the auction.[24]

     Second, the bidding on various licenses should be conducted
simultaneously, not sequentially, to the degree possible.  Under
the Commission's proposed hybrid sealed-oral combinatorial
auction, there would be oral auctions conducted sequentially for
every PCS license in the United States.  Such sequential auctions
will not adequately capture the interdependencies in the value
that bidders place on PCS licenses.[25]  As noted above,[26] PCS
providers will have incentives to cluster geographically
contiguous licenses in order, for example, to offer customers the
ability to travel easily from one license area to another. 
Similar incentives can be expected for parties seeking to acquire
more than one channel block in a given market.

     In a sequential auction, the bidders for a license would not
know whether they subsequently will win additional licenses that
they desire.  Moreover, the losing bidders for the first license
may not bid as aggressively in a subsequent auction for an
adjacent license, so the winner of the first license will not
need to bid as high in order to win the second.  As a
consequence, in a sequential auction, PCS licenses will not
necessarily go to the bidders that value them most highly, and,
as a result, economic efficiency will suffer.  Furthermore, the
government will not recover as much of the value of the spectrum
as it would if it were to auction those licenses
simultaneously.[27]

     For a sequential auction, the Commission also faces
difficult decisions in ordering the sequence in which licenses
will be offered.  As discussed in the staff paper,[28] the order
in which licenses are auctioned has a significant effect both on
economic efficiency and expected revenue.  If, for example, the
Commission first auctions all channel blocks in a given market,
it would be more time consuming and could be less efficient for
parties to aggregate licenses across broader geographic
areas.[29]  Moreover, should the Commission choose to complete
licensing for all licenses in the country in a given channel
block before proceeding to the next channel block, it would be
more difficult for parties to aggregate spectrum blocks in a
given market.  

     Third, the Commission should allow for iterative bidding. 
Under the Commission's proposed two-step hybrid "sealed-oral"
auction mechanism, bidders in the oral portion of the auction
potentially could not respond to a higher bid submitted in the
sealed portion of the auction, either by raising their bids
individually, or by coordinating with bidders for other licenses
in order to raise the sum of their combined bids.  Because the
Commission's proposed process is not sufficiently iterative, a
license may not be awarded to the party that values it most
highly.[30]

     Fourth, the Commission should not complicate the already
complex task each bidder faces in developing its bids.  A major
potential source of such complexity is the uncertainty each
bidder faces regarding the value that other bidders place on PCS
licenses.  One way to reduce such bidding complexity is to
encourage bidders to reveal to others, through their bids, their
valuations for individual and groups of PCS licenses.  Such
information is revealed in an oral auction (or its electronic
equivalent).[31]  In such an auction, each bidder has the
incentive to stop bidding when the auctioned item's price exceeds
the bidder's willingness-to-pay.  This is a simple strategy for
each bidder.[32]

     The Notice's auction proposal is a good faith effort to
grapple with the complexities (and realize the potential
benefits) presented by the PCS licensing scheme adopted by the
Commission.  The Commission recognizes the information-sharing
benefits of English auctions and the need to allow parties to
acquire groups of licenses.  However, we believe that the
Commission should use a more powerful and conceptually simpler
tool to assign individual PCS licenses and groups of licenses
through competitive bidding.

     C.   NTIA's Proposal

     NTIA believes that an "electronic iterative combinatorial
auction" (EICA) is a more effective way to address the complex
PCS licensing arrangements and accomplish the goals of the
auction process contemplated in the Budget Act.[33]  Under such
an auction mechanism, bidders would be allowed to submit
simultaneous electronic bids on any combination of broadband PCS
licenses and would have opportunities to revise their bids (or
submit an initial bid) in response to the actions of the other
bidders.  Applicants would enter their bids on computer
terminals.  The Commission would use computer software to record
and compare the various bids and declare winners of various
licenses or groups of licenses.  As would be the case in an
English auction with a human auctioneer, the winning bidder would
be the party that offered the highest bid for a given license, or
group of licenses.

     Like the Commission's proposal, an EICA would seek to
facilitate the aggregation of licenses.  However, an EICA would
give bidders greater freedom to choose the geographic
combinations of PCS licenses that best meet their needs.  For
example, parties could bid for groups of MTA licenses smaller
than nationwide, groups of BTA licenses smaller than an MTA, or
groups of BTA licenses that cross MTA boundaries.  It also could
facilitate the aggregation of licenses across spectrum blocks. 
This would better promote economic efficiency by enabling the
party that most values a PCS license or group of licenses to
obtain it.[34]  As a consequence, the number of post-auction
exchanges would be minimized.  The EICA would also tend to
increase governmental revenues by enabling bidders to express
their preferences for groups of licenses of their own choosing in
the auction process, rather than in secondary transactions.  

     Like the Commission's proposed oral auction for individual
PCS licenses, an EICA would be an iterative process in which
bidders would continuously receive information about the
preferences of other bidders and would be able to respond in
their own bidding.  Conducting such an auction electronically --
that is, using a computer and terminals -- would merely
facilitate the provision of information about current bids to all
participants.  Moreover, the electronic feature of this proposal
would simplify the process of determining bidders' desired groups
of licenses.

     A critical difference between NTIA's proposal and the
Commission's proposal is that bidding for licenses would take
place simultaneously in an EICA, which would avoid the problems
associated with the Commission having to determine an
economically efficient sequence for bidding.  Computer assistance
makes such "simultaneity" possible by its ability to process bids
quickly and display them so that all bidders have information on
how the bidding is proceeding.  This would better enable bidders
to place bids reflecting the interdependencies in value that
exist among some PCS licenses.

     Computer software that can be modified to implement an EICA
for PCS is available in the public domain and has been used
successfully to allocate resources in a number of
applications.[35]  Our understanding from computer programming
experts is that such software can be customized to incorporate
the specific parameters of the Commission's proposed PCS auction
with relatively little programming effort.  As described in
Attachment 2, the Commission could conduct the EICA using
standard computer terminals[36] and work stations,[37] or hire an
independent contractor to do so.

     The application and the Notice of Intention to Bid
procedures under an EICA would generally be similar to those
proposed by the Commission in its Notice.[38]  After determining
which short-form applications were acceptable for filing, the
Commission would issue a public notice announcing the date and
time at which bidding would begin, the entities that would be
permitted to bid, the security procedures to be followed to
verify bidder identity, and instructions for logging onto the
Commission's computer system and entering bids.[39]  

     At the time designated for commencement of bidding, bidders
would enter their bids through their individual computer
terminals, bidding either on a single license or any group of
licenses they desired.  At designated intervals, the Commission's
computer would identify the current winning bids and notify each
bidder of the discrepancy between its bid and the current winning
bid.  Bidders would then have the opportunity to submit new bids. 
The auction would continue for some period of time, either
several days or weeks, to allow parties time to consider fully
the bidding possibilities.[40]  The Commission would terminate
the auction at some time, not known in advance, when bidding
activity had died down.  The computer would generate a list of
winning bidders for licenses for which bids have been submitted,
and the Commission could then certify the winners as proposed in
the Notice.[41]

     NTIA believes that a workable EICA for auctioning all 2,562
broadband PCS licenses in the United States can be developed
within the statutorily mandated time frame.  The Commission
should test the EICA before bidding commences, and also, as
explained in Attachment 2, conduct practice bidding rounds, open
to the public, to familiarize bidders with the electronic bidding
process.[42]

     The Commission may, however, hesitate to adopt a nationwide
EICA without some initial, actual experience with this method. 
If that is the case, NTIA suggests that the Commission conduct a
limited EICA by May 7, 1994.  This would give the Commission an
opportunity to acquaint the public with this approach, to
identify any practical implementation problems, and to receive
further comment on it.  Once that limited auction is conducted,
the Commission could adopt whatever procedural refinements it
deems necessary and conduct an EICA for the remaining broadband
PCS licenses in the country.

     Ideally, the licenses to be auctioned in such a limited
application should not exhibit strong value interdependencies
with the remaining licenses that would be auctioned in the
subsequent comprehensive EICA.  In addition, the licenses should
be likely to exhibit active bidding to examine how the AUSM
software performs under those circumstances.  Moreover, enough
licenses should be auctioned to determine how bidders are able to
evaluate and respond to bidding on multiple combinations.  There
are several possible candidates.

     One possibility would be to conduct an EICA for all the
licenses across all channel blocks in an area with limited
geographic connections with the rest of the country.  For
instance, the Commission could auction all the MTA- and BTA-
based licenses in the two southernmost MTAs in the state of
Florida (Tampa and Miami).  While some bidders may prefer to
combine these MTAs and BTAs with licenses in adjacent regions,
this area essentially is surrounded by water on three sides, so
the number of adjacent markets is limited.[43]  In addition,
there is likely to be strong bidding activity for PCS licenses
yin this portion of Florida, given the growth in industry and
population in the state.

     Another possibility would be to use an EICA to auction all
the licenses in a given channel block, such as the 51 MTA
licenses in channel block A.  This would confirm the EICA
software's ability to process a larger number of combinations,
and provide bidders experience in developing bids for numerous
combinations.  However, bidders would be precluded from
aggregating licenses across spectrum blocks as well as geographic
markets, which may have a significant impact on both efficiency
and revenue.

     A final possibility would be to conduct an EICA for a number
of narrowband PCS licenses by the statutorily mandated time.[44] 
Although those narrowband licenses have different economic and
technical characteristics than broadband PCS licenses, such an
EICA would provide valuable experience for later application to
broadband PCS. 

     D.   Bidding Competition

     Because of the multiplicity of PCS licenses being auctioned,
bidding competition (the number of bidders) for some licenses is
likely to be weak.  This could be the case, for example, for
licenses in rural areas.  In such a situation, a party might
obtain a license for far less than the price at which that party
actually values it, thus reducing the revenue to the government
from that license, and conceivably the economic efficiency of the
auction process.

     The Commission discusses a reserve price as a means of
protecting the expected return to the government, and royalty
payments by winning bidders as one of several alternative payment
methods, especially for use by designated entities.  Because both
a reserve price and a royalty payment can affect expected
revenues, NTIA believes that these mechanisms could be viable
alternative safeguards against awarding licenses for trivial
sums.[45]  Although both alternatives pose implementation and
efficiency issues, the Commission should consider their use. 
Doing so would be consistent with the provisions of the Budget
Act designed to guard against "unjust enrichment" as a result of
the methods employed to distribute spectrum.[46]

     A reserve price is a price below which a "seller" (in this
case the Commission) will not agree to the "sale" of the asset
being auctioned.[47]  A properly set reserve price can increase
revenue.  It also creates the possibility that the Commission
will not assign a license at all if no bids meet the reserve
price.[48]  Such a "loss" potentially could distort an efficient
assignment of PCS licenses.  Moreover, as the Commission notes,
estimating the appropriate reserve price could be difficult.[49]

     Alternatively, the Commission could set a royalty rate and
solicit bids on an up-front, initial payment.[50]  A royalty rate
can increase both efficiency and the number of bidders for a
license, because it would shift to the federal government a
portion of the risk that the PCS enterprise will be successful. 
Because a bidder will bear less risk with a royalty rate payment,
and will require less up-front capital to participate in bidding,
the result could be more bidders, more aggressive bidding and,
therefore, a higher expected revenue.  

     Compared to a reserve price, NTIA prefers a royalty as a
method to ensure revenue to the government because it does not
raise the possibility that the PCS license will go unassigned. 
Thus, the public interest benefits of the rapid provision of PCS
would be preserved.  However, as the Commission notes,[51]
setting an appropriate royalty rate may be difficult, and could
require the Commission to establish accounting rules or revenue
reporting requirements for entities that use PCS licenses as part
of an integrated communications service.  Moreover, a royalty
would result in a lower initial payment to the federal government
for PCS licenses than a lump-sum payment.  Nevertheless, despite
these difficulties, NTIA believes that the Commission may be
justified in employing either a reserve price or a royalty rate
in order to avoid assigning PCS licenses for trivial sums.

III. TREATMENT OF DESIGNATED ENTITIES

     The Budget Act directs the Commission to consider the needs
of small businesses, rural telephone companies, and businesses
owned by members of minority groups and women in the competitive
bidding process.[52]  NTIA believes that this is an important
objective for the federal government, and encourages the
Commission to develop rules to implement competitive bidding for
PCS that will provide greater opportunities for participation by
these groups, particularly those that are constrained from full
participation in bidding because of a lack of available capital. 

     Among other things, the Commission seeks comment on the
extent to which it should, and has the authority to, extend
preferences to minorities and women.[53]  Under the governing
legal standard, the Commission must demonstrate that preferences
for minorities and women are substantially related to the
objectives of the Budget Act.[54]  As the Commission notes,
extending preferences to small businesses and other small
entities could indirectly promote opportunities for women and
minorities.  However, preferences tied to status regardless of
economic circumstances could pose legal problems, depending on
the applicable legal standard of judicial review.[55]  In the
discussion that follows, we do not address the constitutional
issues raised by the Commission, but focus on policy issues.

     The Commission requests comment on measures proposed by the
Small Business Advisory Committee in its report on PCS
licenses.[56]  NTIA agrees generally with the intent and
direction of the findings and conclusions of that report. 
Capital formation is one of the major barriers to full
participation by small and minority businesses in the
communications field, and the Commission should undertake
measures to promote licensing opportunities for such capital-
constrained groups.  As a matter of economic theory, capital-
constrained firms, such as some small businesses and many of
those owned by minorities and women, are likely to assign lower
values to PCS licenses than other bidders due to the effects of
bidder asymmetry.[57]  Hence, capital-constrained firms are
unlikely to win licenses in an open bidding market.  The
Commission's tentative decision to set aside two PCS licenses in
every market for bidding by designated entities will ensure
greater economic opportunity for such groups.[58]

     NTIA supports the Commission's proposal, consistent with the
Small Business Advisory Committee's report, to allow designated
entities to pay for their PCS licenses in installments.[59]  We
believe that installment payments should be available for
designated entities that win non-set-aside licenses as well as
set-aside licenses.

     NTIA also agrees with the Small Business Advisory
Committee's recommendation to expand the Commission's tax
certificate program to include PCS licenses.[60]  Tax
certificates should be available to investors in those Small
Business Investment Companies (SBICs) and Specialized Small
Business Investment Companies (SSBICs) that specialize in
telecommunications and agree to commit funds to PCS firms and
related enterprises.[61]  The SBICs and SSBICs, which are
chartered by the Small Business Administration, would have
greater access to capital, which could be used to provide start-
up financing to small businesses and businesses owned by minority
groups and women that win PCS licenses through competitive
bidding.  The investors in such SBICs and SSBICs would be
entitled to defer capital gains upon selling their interests.

IV.  CONCLUSION

     NTIA supports the Commission's efforts to establish an
appropriate auction mechanism for PCS licenses.  Accordingly,
NTIA respectfully requests that the Commission adopt the
recommendations contained in these comments.
     Respectfully submitted,

Larry Irving                                               
Assistant Secretary for            Alden F. Abbott
  Communications and Information   Chief Counsel

Thomas J. Sugrue                                            
Deputy Assistant Secretary for     Phyllis Hartsock
  Communications and Information   Deputy Chief Counsel

Michele C. Farquhar
Chief of Staff
                                   
William F. Maher                   
Associate Administrator            

Mark M. Bykowsky
Robert Cull
Joseph L. Gattuso
Carol E. Mattey
Office of Policy Analysis
  and Development

                                   National Telecommunications
                                   and Information Administration
                    
                
U.S. Department of Commerce
Room 4713
14th and Constitution Ave., N.W.
Washington, D.C.  20230
(202) 482-1816

November 10, 1993

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                              ENDNOTES

[1]  Implementation of Section 309(j) of the Communications
Act Competitive Bidding, Notice of Proposed Rulemaking, PP
Docket No. 93-253, FCC 93-455 (released Oct. 12, 1993)
(Notice).

[2]  Omnibus Budget Reconciliation Act of 1993, Pub. L. No.
103-66, Title VI -- Communications Licensing and Spectrum
Allocation Improvement,  6002(d)(1), 107 Stat. 312 (1993)
(Budget Act).

[3]  See Amendment of the Commission's Rules to Establish
New Personal Communications Services, Second Report and
Order, Gen. Docket No. 90-314, FCC 93-451 (released Oct. 22,
1993) (PCS Second Report and Order ).  For simplicity, the
use of the term PCS in this pleading generally refers to
broadband PCS as defined by the Commission in the PCS Second
Report and Order, para. 24.

[4]  See Budget Act,  6002(d)(2)(B).  The statute does not,
however, distinguish between broadband and narrowband PCS.

[5]  We agree with the Commission's conclusion in para. 116
of the Notice that PCS is a type of use to which competitive
bidding should be applied.  See Budget Act,  6002(a), to be
codified at 47 U.S.C.  309(j)(2).

[6]  See Budget Act,  6002(a), to be codified at 47 U.S.C. 
 309(j)(3).

[7]  Mark Bykowsky & Robert Cull, Issues in Implementing a
PCS Auction (Nov. 10, 1993) (NTIA Staff Paper), attached
hereto as Attachment 1.

[8]  Recognizing that NTIA's proposal differs from the
Commission's, it may be reasonable for the Commission to
issue a public notice regarding NTIA's proposal and extend
the deadline for reply comments, now due November 24, 1993,
to permit additional comment on it.

[9]  See Albert Gore, From Red Tape to Results: Creating a
Government that Works Better and Costs Less, Report of the
National Performance Review 112-15 (1993).

[10] See Albert Gore & Ronald Brown, The National
Information Infrastructure: Agenda For Action, 58 Fed. Reg.
49,025, 49,026-27 (Sep. 21, 1993).

[11] See PCS Second Report and Order, paras. 64, 73, 76-77.

[12] While most major cellular companies have established
"roaming" arrangements among themselves so that customers
can continue to use their cellular phones when traveling
outside the license areas of their cellular providers, such
arrangements tend to be offered only as a premium service. 
The trend toward geographic clustering of cellular service
areas through mergers, acquisitions, and "swaps" observed in
the marketplace tends to confirm that there is some value
interdependence among adjacent service areas.

[13] The Commission recognizes this possibility by
permitting bidders (other than some incumbent cellular
providers) to aggregate up to 40 MHz of spectrum in any
area.

[14] Notice, para. 46.

[15] Notice, para. 39.

[16] Notice, para. 120.

[17] The Commission seeks comment on whether to use
combinatorial bidding to facilitate the grouping of BTA
licenses.  Notice, para. 123.

[18] Notice, paras. 120, 123, 125.

[19] The Commission also seeks comment on whether to use a
second round of sealed bidding for winners of the first
round.  Notice, paras. 60, 120.

[20] Notice, para. 124.

[21] Notice, para. 125.

[22] We agree with the Commission that it has the authority
under the Budget Act to design and conduct a combinatorial
bidding system, and that its proposal is not inconsistent
with the provisions of that Act.  See Budget Act,  6002(a),
to be codified at 47 U.S.C.  309(j)(7)(A).  We believe that
NTIA's proposal is similarly consistent with the Budget Act.


[23] NTIA Staff Paper at 48, 64-65.

[24] The Commission assumes that, as a general matter, the
resale of a license acquired by competitive bidding will not
involve any unjust enrichment warranting restrictions on
subsequent transfer because the auction winner has paid a
"market price" for the license.  It notes, however, that
there may be a need to prevent unjust enrichment arising
from the transfer of some licenses obtained by "designated
entities," as defined by the Commission, pursuant to
specific provisions designed to ensure their participation. 
See Notice, paras. 83-84.

[25] In addition, it would take a relatively long time to
complete sequential auctions for 2,562 separate PCS
licenses, particularly if conducted by a human auctioneer. 
Such an approach could delay licensing unnecessarily for
many areas of the country.

[26] See discussion supra at p. 6.

[27] NTIA Staff Paper at 48-49, 58-65.

[28] NTIA Staff Paper at 60-63.

[29] The Commission has requested comment on licensing
spectrum blocks in descending size according to population,
which is generally the process it used in the cellular radio
service.  If, for instance, the Commission offers the
largest market first, a bidder may have an incentive to bid
aggressively for that license because of its synergy
valuation for the group of licenses it desires.  As a
consequence, however, the bidder may exhaust its financial
resources, making the bidder less able to acquire licenses
for the smaller, adjacent markets.  On the other hand, if
the Commission auctions the smallest market first, a bidder
may have an incentive to underbid so as not to convey
information to other bidders about its valuation of the
license for the market hub to be auctioned later. 

[30] See NTIA Staff Paper at 67.  This problem would not
exist to the same degree, however, if the Commission were to
allow winners of the sealed round and winners of the oral
round to submit new sealed bids.  See discussion supra note
19.  This would permit bidders in the oral round to respond
to the first round sealed bids.  However, it still would not
allow for iterative responses by all bidders.

[31] See NTIA Staff Paper 45-46.

[32] In contrast, in a first-price sealed-bid auction, each
bidder must anticipate how others will bid when choosing its
sealed bid.  In such an environment, each bidder must
consider the trade-off between bidding too little (and
losing the auction) against bidding too much (and reducing
the surplus it earns from the auctioned item).  As a result,
a first-price sealed-bid auction creates a more complex
bidding environment for bidders than an oral auction. 
Moreover, because the bidder that places the highest value
on the auctioned item may not win in a first-price sealed-
bid auction, such an auction could generate less revenue
than an oral auction.

[33] NTIA recognizes that the Budget Act mandates that the
Commission test multiple alternative methodologies for
competitive bidding.  Budget Act,  6002(a), to be codified
at 47 U.S.C.  309(j)(3).  We believe that NTIA's proposed
EICA is an innovative methodology well suited to the
complexities of the PCS licensing scheme.  Other
methodologies may be more appropriate for other classes of
licenses.

[34] Like the Commission's proposal, the sums of bids for
individual licenses would be compared with the highest bids
for groups containing those licenses.  Using an EICA,
however, many more combinations could be compared.

[35] The software, entitled "Adaptive User Selection
Mechanism" (AUSM), has been used by the Jet Propulsion
Laboratory to assign scientific resources on the space
station planned by the National Aeronautics and Space
Administration.

[36] NTIA understands that the California Institute of
Technology has used an IBM RS 6000 to run AUSM software in
competitive bidding experiments.

[37] If the Commission chooses, it could authorize bidders
to participate in the auction from across the United States,
either through terminals at the Commission's field offices
or by using ordinary personal computers connected to the
Commission's system.

[38] Notice, paras. 167-68, 170-71.  As a matter of economic
theory, it would be best if potential bidders are not
required to specify the licenses on which they are planning
to bid prior to commencement of the EICA.  As discussed in
Attachment 2 at 1 n.2, forcing bidders to pre-commit to
participating in the bidding for specific licenses inhibits
their ability to respond to market forces.  However, as a
legal matter, it may be necessary for the Commission to
require prospective bidders to file short-form applications
for specific licenses in order to determine whether there
are mutually exclusive applications for each license that is
to be auctioned.  

If the Commission does require parties to file a short form
application for every license on which they may possibly
bid, bidders wishing to preserve their ability to
participate flexibly in the auction would file numerous
applications, perhaps for more licenses than they ultimately
acquire.  In this situation, it could be difficult for the
applicant to tender the requisite up-front payment,
especially using the Commission's proposed formula of 2
cents per MHz per pop.  See Notice, para. 126.  An
alternative would be for the Commission to require the
applicant to specify a cap on total bidding expenditures,
based on its available credit, and require a percentage of
that cap to be tendered as the up-front payment.

[39] In addition to the application requirements discussed
in the Notice, paras. 95-101, 128-29, the Commission would
need to establish guidelines for potential bidders on how to
log onto the system from remote terminals or personal
computers, and adopt some form of password system to ensure
that only authorized bidders participate in the auction.

[40] Attachment 2 at 5-6.  The computer program also could
provide a mechanism for cooperative bidding strategies, by
notifying winning bidders for individual licenses how they
could outbid a party bidding on a group of licenses by
collectively increasing their bids.  See NTIA Staff Paper at
68.

[41] Notice, para. 172.

[42] See Attachment 2 at 2.

[43] Two states with comparable geographic characteristics
are Hawaii, which has four BTAs, and Alaska, which has three
BTAs.  Due to the rural and unpopulated nature of much of
Alaska, the level of bidding activity in that state may be
relatively low, so that this would not be as indicative of
the EICA's ability to respond to multiple bidders.  On the
other hand, there may not be much "combinatorial" bidding
activity in the state of Hawaii, as each BTA is separated
from the others by the Pacific Ocean, which may limit to
some extent the value of owning a combination of licenses.

[44] See PCS Second Report and Order, Appendix A, Subpart D
(proposed narrowband PCS rules); Narrowband Personal
Communications Services, 58 Fed. Reg. 42,682 (Aug. 11, 1993)
(summary of First Report and Order).

[45] See NTIA Staff Paper at 38-40.

[46] See Budget Act,  6002(a), to be codified at 
309(j)(3)(C), (j)(4)(E).  

[47] A reserve price differs from a "minimum bid" in that
the former is customarily not disclosed to bidders prior to
completion of the auction.  We interpret the Commission's
discussion in the Notice as applicable to a "reserve price." 
See Notice, paras. 66-67.  

[48] If the Commission used a reserve price, it would not
permanently decline to assign the license.  It could
evaluate the results of successful bidding for similar
licenses, adjust the reserve price, and hold a new auction
when it chose to award the license.

[49] Notice, para. 67.

[50] For many federal government oil and gas leases, for
example, a royalty is set in advance, and the bid is only
for the bonus, or up-front payment.  The royalty is based on
gross revenues, and based at least in part on an estimate of
what the royalty would have been in a private negotiation. 
For example, 43 U.S.C.  1337 grants the Secretary of the
Interior authorization to promulgate regulations for the
awarding of certain types of Outer Continental Shelf and gas
leases through competitive bidding.  Section 1337(a)(1)(A)
allows a "cash bonus bid with a royalty at not less than 12
per centum fixed by the Secretary . . . ."  Other
subsections permit additional formulations of bids.

[51] Notice, para. 70.

[52] Budget Act,  6002(a), to be codified at 47 U.S.C. 
 309(j)(3)(B), (j)(4)(D).

[53] Notice, para. 74.

[54] Notice, para. 73 (citing Metro Broadcasting, Inc. v.
FCC, 497 U.S. 547 (1990); Richmond v. J.A. Croson Co., 488
U.S. 469 (1989); Fullilove v. Klutznick, 448 U.S. 448
(1980); Lamprecht v. FCC, 958 F.2d 382 (D.C. Cir. 1992)).

[55] Notice, para. 75.

[56] Notice, para. 80 (citing Report of the FCC Small
Business Advisory Committee to the Federal Communications
Commission Regarding Gen Docket 90-314 (Sep. 15, 1993) (SBAC
Report)).

[57] See NTIA Staff Paper at 32.

[58] See PCS Second Report and Order, para. 60 n.61; Notice,
para. 125.  NTIA urges the Commission to structure its
preferences for minorities and women in a fashion that
minimizes abuse.  We agree with the Small Business Advisory
Committee that minority- and female-backed applicants should
be 51% controlled by minorities or women, SBAC Report at 22,
and that licenses awarded to designated entities should be
subject to an anti-trafficking provision.

[59] Notice, para. 68.  There are also bidding competition
issues for the set-aside blocks analogous to those discussed
supra at p. 22.  NTIA therefore supports the use of royalty
payments, if the Commission believes them appropriate, for
designated entities as a way of encouraging greater
participation for the bidding on such licenses, while also
preventing them from being assigned for trivial sums.

[60] We agree with the Commission, however, that it should
implement specific procedures to prevent unjust enrichment
to parties that obtain licenses pursuant to some specific
provision designed to ensure their participation in the
provision of spectrum-based services.  See Notice, paras.
83-84.

[61] We believe the Commission has the legal authority to
extend its tax certificate policy in this fashion.  See
Budget Act,  6002(a), to be codified at 47 U.S.C. 
309(j)(D)(4); Telocator Network of America, 58 Rad. Reg. 2d
(P&F) 1443, 1447-50 (1985), recon. dismissed, 1 FCC Rcd 509
(1986) (tax certificates may be issued with respect to
transfers of non-wireline cellular interests).  See also
SBAC Report at 19-20.