-15-

(6) Repealing many of the artificial regulatory distinctions between
common carrier, broadcasting and private radio uses including
restrictions on types of services, kinds of users, and the right to earn
unregulated profits;
(7) Allowing all or most users much more flexibility in the kinds of
permissible communications;
(8) Reducing the number of separate classes of allocations;
(9) Avoiding the use of comparative hearings and instead using (in order
of preference):

(a), auct ions

(b) lotteries

(c) expedited paper hearings
(10) Instituting spectrum fees.
It should be noted that the Commission definitely has the legal authority
to make some of these deregulatory changes; whereas others may require
changes in the Communications Act of 1934.
(A) Insuring That Users Have a Clear and Unambiguous Property Right

In order for users to have an economic incentive to look for more

efficient ways to produce services, they must have a clear property right


-36-

Processes .43/ It is obvious, however, that wealthy individuals and large
firms do not obtain all the land, houses, buildings, automobiles, trucks,
or employees. They do not do So for two reasons: first, no firm or

individual has the wealth to buy up all those resources. Second, even if

Some firm or individual had the necessary wealth, there is no reason to

access to the most valuable television broadcasting frequencies, so that

the argument that if Spectrum markets replace administrative Procedures

the Commission Could still establish market share rules such as: no firm
or individual may control more than 20 percent of all available spectrum
in any band in any one standard metropolitan Statistical area, or any

region of the U.S., or the U.S. aS a whole. Note that the term used

7 For a review of Some of the issues, see: Douglas Ww. Webbink and Carlos
. A

Roberts, "Spectrum uctioning: Pro,* Pp. 8-10; Arthur Blooston, “Spectrum
Auctioning: Con,” pp. 10-11, 26; and Alan A. Reiter, “What RCC's Think About
Spectrum Auctioning," Pp. 13, 27; all in Telelocator (January 1980). See
also: Nina We Cornell, "Spectrum Economics: or,” and Morgan 0! Brien,
“Spectrum Economics: Against," Mobile Times, (February 1980), pp. 16-19, 24;
and "More on the Spectrum Economics ebate,” Nina Ww. Cornell, "Rebuttal for
the Proposal," and Morgan 0' Brien, “Rebuttal Against The Proposal," Mobile
Times (March 1980), pp. 24-26,


-32-

Lotteries are also faster and less costly than comparative
hearings.40/ There is no guarantee, however, that the winner of a
lottery is the one to whan the license is most valuable. Therefore, it
is important that the lottery winner have the right to sel] immediately
the license. Thus, an important corollary of lotteries is that resale be
allowed (i.e., that antitrafficking rules be repealed).

If resale is allowed, then ultimately the licensee is likely to be
the same in a lottery as in an auction. The difference, of course, is
that in the lottery the lottery winner keeps the economic profits or
Capital gains or "economic rents" from the value of the spectrum. In
contrast, in an auction, the government keeps those economic rents.
Another point is that in a lottery in which the license is worth millions
of dollars, there are likely to be many applicants and the possibility of
cheating or fraud obviously exists. Therefore, with a lottery there is a
need for very effective checking and policing by the Commission.

An expedited Paper hearing is simply a shorter and more efficient
kind of comparative hearing. While it does not have all the advantages
of an auction or lottery, it may still be faster ang less costly than a

couparative heari ng.

Between two FM station applicants using a lottery. See “News: FCC Instructs
Staff to Prepare Decision Selecting ere Licensee by Use of Lottery
19)

On CAB lotteries for new route authorities, see: U.S. Civil Aeronautics Board,
Order in Dockets 33889, 33764 et, al., November 30, 1978, Order 78-11-152,

On the question of the "fairness" of lotteries, see: "The Equality of
Allocation by Lot," Harvard Civil Rights Civil Liberties Law Review, 12
(Winter 1977), pp. 1T3-YST-



-41-

reflect the true opportunity cost of its use just as the price of
gasoline should reflect the true opportunity cost of its use]. If the
price of any resource (such as gasoline) is articially set below its
market clearing price, there will be excess demand which may lead to
shortages, long lines, or a request for government allocation or
rationing decisions. It is far more efficient to allow the price to rise

for gasoline and for spectrum.

VII. Conclusions

The purpose of this paper was to review some of the possible
Spectrum deregulatory proposals that have been suggested both within and
outside the Commission. The paper is not intended to be all inclusive.
Nevertheless, it should give an indication of directions for further
deregulation. As this paper has indicated, many of the proposals
complement each other. Among the proposals that seem most important are:
° Allowing freer transferability of licenses
0 Limiting the Use of Petitions to Deny
to) Allowing Sharing and Resale
° Allowing more technical flexibility
° Allowing more flexibility in permissible kinds of communications
° Giving all users a clear but limited property right
° Reducing the number of separate classes of allocations.

Among the most important but highly controversial changes are:

0 Using auctions and lotteries instead of comparative hearings


“9

However, one need not legally own the apartment, the sunlight or the
river in order to exercise that economic property right.

The difference between legal ownership and an economic property
right is a significant distinction because Section 301 of the
Communications Act of 1934 states that:

It is the purpose of this Act, among other things, to

maintain the control of the United States over all the
channels of interstate and foreign radio transmission;
and to provide for the use of such channels, but not the
ownership thereof, by persons for limited periods of
time, under licenses granted by Federal authority, and no
license shall be construed to create any right, beyond
the terms, conditions, and period of the license.9b/

If users had a clear use right to a certain area, bandwidth,
frequency and time of day that they could use in many different ways,
then those users might find it worthwhile to use lower power
transmitters, shorter antennas or directional antennas, and sell or rent
to someone else the right to use part of their coverage area. Similarly,
if users were allowed to time share and frequency share their assigned
channel, and if they were allowed to make a profit on the sharing, they
would have an incentive to find ways to split channels, multiplex
Signals, etc.10/ When the Commission has given some users a band of
frequencies and allowed those users to develop more intensive ways to use
the frequencies and retain the use of any channels that become available

by using new technology, users (such as canmon carrier operators of

Sb7 47 U.S.C. Sec. 301 (1934).

10/ Note: Some users such as FM stations may share their frequency and make
a profit through use of an SCA; other users may time share a frequency but not
make a profit (cooperative sharing by land mobile users).


Excess Supply: When the quantity supplied of any good or service exceeds the
Quantity demanded at the existing price. Whenever sellers have excess
inventories that they wish to sell, that is an indication of excess supply
(for example, when auto dealers have large stocks of unsold cars).

Marketable Rights: Property rights that may be traded (bought or sold) in a
Market. ;

Opportunity Cost: The value of the last unit of a resource in its best
alternative use. Hence, the Opportunity cost of using 6 MHz to broadcast a
UF television signal is the value of that 6 MHz for its best alternative use
(which May be to broadcast another television signal, or to Provide 400 15 kHz
mobile radio channels or some other use),

Property Rights: Legal rights to use a good or service that are owned or
controlled by Someone and may be bought or sold.

Spectrum Markets: The idea that individuals have the right to buy and sel]
the right to use the frequency Spectrum and that the supply and demand for
Spectrum will determine its market price.

Spectrum Input Rights. Spectrum use rights that are defined in terms of
inputs into the use of the spectrum such as transmitter Power, antenna height
and effective radiated power at the antenna. Most FCC regulations are based
on input rights.

Spectrum Out put Rights: Spectrum use rights based upon area covered,
bandwidth used, and time of the day by a signal of @ given signal strength or

Signal-to-noise ratio. "e


-49-

Notice of Inquiry and Proposed Rule Making in CC Docket No. 80- 113,

(technical requirements for MDS), adopted March 19, 1980, released April 24,
1980, FCC 80-137, 45 Fed. Reg. 29350.

Notice of Inquiry in PR Docket 80-440, (allowing land mobile stations to
choose new technologies) adopted August 1, 1980, released September 9, 1980,
FCC 80-484.

Recent Deregulatory Staff Reports
Report and Recommendations in the Low Power Television Inquiry, BC Docket 78-

253 (October 1980).
FCC, Office of Plans and Policy, Staff Report on: Policies for Regulation of

Direct Broadcast Satellites by Florence 0. Setzer, Bruce A. Franca and Nina

W.Cornell (September 1980).


-47-

(4) Define FCC area of protection for MDS licensees, but allow licensees
to negotiate other areas of protection with other co-channel
licensees .49/

(5) Allow time sharing of ITFS and MDS facilities or channels.50/

B. Broadcasting Lottery
The Commission recently instructed the staff to write an Order to

set up a lottery to choose between two of three mutually exclusive

applications for an FM radio station license.51/

C. New Land Mobile Radio Technologies

A general inquiry was opened to investigate possible changes in the
Commission's Rules to provide incentives for the introduction and use of new
technology in land mobile communication. The initial effort is directed
toward narrowband technology; i.e., radio equipment using modulation
techniques that require much less bandwidth than the prevailing FM systems.
Spectrum saved might be retained by the licensees to provide additional
communication channels, establish “guard” bands to reduce interference, or be

sold to other eligible users.52/

57 Notice of Inquiry and Proposed Rulemaking in CC Docket
BO-113, adopter rel > > releas pril, 24, 1980, FCC
80-137.

50/ Notice of Inquiry, Proposed Rulemaking and Order in Gen. Docket 80-112,
‘adopted March 19, Tab released May 2, 1380; FCC 80-136.

51/ “News: FCC Instructs Staff to Prepare Decision Selecting Broadcast
License by Use of Lottery,” (Dockets 20567-69), Report No. 15650, May 30,
1980).

52/ Notice of Inquiry in PR Docket 80-440, adopted August 1, 1980; released
September 9, i 80-484,


~19-

licenses, it approves most of them. Hence broadcasters have a clear
expectation that they can sell their license. Common Carriers and
private radio users are allowed to sell their licenses with Commission
approval, but private radio users do not have any incentive to sell since
any eligible person can get a new license fran the Commission.

This proposal goes far beyond merely allowing users to sell their
license for a profit. What this proposal suggests is that it is in the
public interest to allow users to sell their license at any time to any
qualified applicant. Therefore, the proposal implies that
antitrafficking rules in all radio services should be abolished.
Trafficking (the selling of a license within a two or three year period
of receiving the initial license) is forbidden by various parts of the
Commission rules.23/ Whenever a license is sold it must be because the
seller values the money more than the license, and the buyer values the
license more than its money price. Hence, both parties gain fran the
transaction, and society gains since a resource has been transferred from
a lower value to a higher value use. Hence, "trafficking" like selling
land and houses for a profit, should be allowed and not be discouraged or
forbidden.

A second and more controversial part of this deregulatory proposal
is that transfers of licenses to qualified applicants should be allowed
without prior Commission review. Section 310(d) of the Communications

237" § 1.597 for broadcasting stations; § 22.40 for public mobile radio
services. Under § 1.924 private radio licenses are not transferable; however,

some licenses may be assigned when there is a change in ownership of the
transmitting station.


-37-

here is available spectrum, not just channels in use. Thus, under this
Proposal a firm would be allowed to control a certain maximum percent of
the spectrum regardless of whether the remainder was in use or sitting
idle. Also, such a rule would preclude any one from controlling 100
Percent of the spectrum in any one city, but would allow a firm to
control 5 percent of the spectrum throughout the country.

The opposite side of this argument that some people make is that
certain desirable users (such as police departments, fire departments or
educational institutions) will be unable to obtain the spectrum they
“need" or at least want. There is no reason why these users could not
pay for spectrum just as they now have to hire employees, buy land,
automobiles, radios, etc. In the case of police and fire departments it
would even be possible to give them a right of eminent domain. It should
be noted that even government agencies that exercise their right of
eminent domain over land have to pay fair market value for resources;
they do not receive them "for free." Nevertheless, if it were considered
necessary for public interest or political reasons to reserve a certain
amount of spectrum for public safety use without charging anything to
police departments, that need not constrain the use of market mechanisms
for the remainder of the spectrum by other kinds of users. However, if
certain classes of users such as Public safety organizations are given
Special treatment outside of spectrum markets, that class of user should

be limited to as few. organizations as possible.


ee wees

Are Adopted

B. It Is Technically Complex To Establish And
Enforce Marketable Spectrum Use Rights . .
C. Same People Will Lose If Market Mechanisms
D. International Treaties Restrict Spectrum Market
Options in the US... 2... 2.2 ee ee
£. Much Of The Spectrum Is Shared Between Uses
Allocated To Federal Organizations By IRAC
And Uses Allocated To Others By the FCC. IRAC
Has No Plans To Institute Spectrum Markets
F, Auctions And Fees Are Inflationary... .
VI. Conclusions ...... ee ee eww wee

APPENDIX A - Questions To Ask Concerning Any Spectrun

Deregulatory Change... .. 2.2.2.

es

APPENDIX B - Examples of Recent FCC Spectrum Deregulation

A
B.
Cc.

Proposals». 2 eee eee ev eee
Multipoint Distribution Service... ..
Broadcasting Lottery... 1... see ee

New Land Mobile Radio Technologies... .

APPENDIX C ~ Recent FCC Actions That Explicitly Raise

Spectrum Deregulation Issues... 2-2. ee ee ee

APPENDIX D - Glossary 2. eee wee ew were ee eee

ii

38
38

39

40
41

43

46
47
47

48


2

hearings. Comparative hearings are Slow and costly; the Public is harmed

by the loss of service due to Tegal delays. Equally important is the

Public. At least three alternatives to traditional Comparative hearings
have been Proposed: auctions, lotteries or Paper Proceedings. Al] of
these options were suggested in the recent mps Notice of Inquiry and
Notice of Proposed Rule Making.37/

Auctions have severa] advantages: the license tends to go to the
user who wil] Pay the most and for whom the license is most
valuable.38/ It is economically efficient to allow resources to go to

their highest value use, Auctions substitute decisions of the market for

377 Notice oF Inguir: and Notice of Pro osed Rulemaking in CC Docket

No. 80-Ii6- adopted March 19, i released May 2, » FCC 80-141. The
issue of using lotteries or auctions was also raised in the Xerox XTEN
Proceeding and the cellular mobile radio Proceeding. See: Notice of Pro josed
Rulemaking and Inquiry in Gen. Docket 79-188, adopted August Tt 1579, Released
ugust 29) 3 9-464, appendix C; and Notice of In luiry and Notice of
Proposed Rulemaking in CC Docket 79-318, adopted November 25, 1975, released
January 3, 1980, Fee 79-774, Para. 45-51,

38/ It should be noted that the bidder willing to Pay the most is not

necessarily the one with the most Money: willingness to pay is Not the same
aS ability to Pay. See below, pp. 36,


-16.

license for a long time in the future.
In contrast, most Private radio licensees do not have such a
Property right because there is unlimited loading and Sharing for most

mobile private radio assignments below 800 MHz, Therefore, those

S this paper ndicated earlier, a Person may obtain an economic property
Tight to use the spectrum without any implication that the person legally owns
the spectrum. On Property rights, see especially; Richard A, Posner,
Economic Anal sis of Law, 2d edition, (Boston: Little Brown and Co., 1977),
“Property,” chapter 3; PP. 27-64; Jora R. Minasian, “Property Rights in
Radiation: An Alternative Approach to Radio Frequency Allocation," Journal of
Law_and Economics, vol. XVIII (April, 1975), Pp. 221-272; Arthur sy any,
oss D. Ec ert, Charles p, Mayers, Donald J. O'Hara and Richard Cc, Scott, "A
Property System for Market Allocation in the Electromagnetic Spectrum: A
Legal -Economic-Engineer ing Study," Standard Law Review, Vol. 21 (1969), Pp.
1499-1561, and Ronald H, Coase, "The Fe, eral Communications Commission,"
Journal of Law and Economics vol. IT (October, 1959), pp. 21-40. See also:
Ws, Department oF Commerce, Office of Telecomuun ications, Metrics for
Spectrum-Space Usage, by Donald R, Ewing and Leslie A, Berry, (Washington,
«C.: Government rinting Office, November 1973), oT Report 73-24,


-22-

are not in the public interest. The Commission already dismisses or
denies many of those petitions. It might be desirable to attempt to have
Section 309(d)(i) either deleted or at least limited in Scope, and to
repeal the Carrol] Doctrine.

267In the atter Case, the petitioning organization often wants some service

tO be provided for free or at least below Cost and to be subsidized fran some
other Profit-making service. Such internal cross Subsidies always lead to
inefficient use of economic resources. See; Nina W. Cornel] and Douglas wW.
Webbink, "Common Carrier Regulation and Technological Change: The New
Competition in the Communications Industries," October 1979, to be Published
by the Joint Economic Committee of Congress.

27/ The Carrol Doctrine states in Part that:

“When an existing licensee offers to prove that the
economic effect of another station would be detrimental
to the public interest, the Commission should afford an
Opportunity for Presentation of such Proof and, if the
evidence jis substantial (iee., tf the Protestant does not
fail entirely to meet his burden), should make a finding

or findings." Carrol] Broadcasting Co. v. FCC, 258 F. 2a
440, 443 (D.c. Gir. TSBB).


right. The recent Mathtech report Suggests a number of improvements in

that frequency coordination Process .20/

took was to Say that owners of Satellite receive only earth Stations do
not need a Commission licence unless they wish to be Protected against
interference, Thus, unless an Owner of a receive only earth station
desires a reception property right, no Commission action is required. 21/

B) Allowing Users to Transfer Their License to any Qualified Applicant

{Abolishing Most or All Antitrafficking Rules)

If users are to benefit from a clear (although Somewhat limited)
Property right, it would be important that they be allowed to sell that
right or license for @ profit.22/ While the Commission (or the Bureau
staff on delegated authority) reviews all transfers of broadcast
207 Mathtech Thc. , and Tel ecommunications Systems, Economic Techniques for
Spectrum Management : Final Report, Sections V and - It is Tmportant to
note that the kin

or frequency coordination the Mathtech report talks about
is very different from the kind of frequency coordination done by private

21/ First Re, ort _and Order in the matter of Regulation of Domestic Receive ~
only Satellite Earth Stations, CC Docket 78-374, 74 F.C.C. 2d 205 (1979),

‘Fntangible rights is being tested with regard to “pol lution rights." See:
Bruce Yandle, "The Emerging Market in Air Pollution Rights," Re ulation,
(July/August 1978), pp. 21-29, See also: Hugh H. Macaulay and Bruce Yandte,

Environmental Use and the Market, (Lexington: Lexington Books, D.C. Heath and
Co. 1977}.


decisions of a regulatory agency; they provide a clear indication of the
value of the spectrum to that user and they allow the government to
obtain or capture some of the value of the spectrum resource it is

allowing private parties to use.39/

397 See: John 0. Robinson, “Assignment of Radio Channels in the Multipoint
Distribution Service by Auction," in Herbert S. Dordick, editor, Proceedings

of the Sixth Annual Telecommunications Policy Research Conference,
(Lexington: Lexington Books, D.C. Heath, Inc., 1979) Pp. 379-591. See
also: Mathtech, Inc. and Telecommunications Systems, Economic Techniques for
Spectrum Management: Final Report, Sections VII, VIII, XI-XIIT; "Frequency
and Orbit,” chapter 13 by Nina W. Cornell in Seyom Brown, Nina W. Cornell,
Larry L. Fabian and Edith Brown Weiss, Regimes for the Ocean, Outer Space and
the Weather, (Washington, D.C.: The bookings Institution, 1977); charles L.
Jackson, "The Orbit-Spectrum Resource: Market Allocation of International
Property,” Telecommunications Policy (September 1978), pp. 179-190; Charles
Lee Jackson, "Technology for Spectrum Markets," Ph.D. Thesis, Massachusetts

Institute of Technology, Department of Electrical Engineering and Computer
Science, November 1976.

Auctions have been used by the Federal government to distribute many kinds of
mineral resources. See for example: U.S. Department of the Interior, Federal
Coal Management Program, Bureau of Land Management, U.S. Geological Survey,
Office of Policy Analysis, Final Report and Recommendations for the Secretary
on Fair Market Value and Minimum Acceptable Bids for Federal coal Leases,
ecember 3 Douglas Kent Reece, "Leasing Offshore 2 alysis of
Alternative Information and Bidding Systems," Ph.D. Dissertation in Business
Administration, University of California, Berkeley, May 1977; Robert J.
Kalter, Wallace E. Tyner and Daniel W. Hughes, Alternative Ene: Leasin
Strategies and Schedules for the Outer Continental Shelt, tornely University,
Department of Agricultural Economics, (December 1975), A.E. Res. 75-33; U.S.
Senate, Committee on Interior and Insular Affairs, Report to the Federal Trade
Commission on Federal Ene Land Policy: Efficiency, Revenue ani
Competition, prepared by the Bureaus ampetition and Economics, 94th Cong.,
2d Sess., serial 94-28, (Washington, D.C.: Government Printing Office,
1976). The Federal Aviation Administration is now considering using auctions
to allocate landing and takeoff slots at high-density airports. See:
Robert b. Parke, “Bidding Your Time: Takeoff and Landing Slots May Soon Be
Upon the Auction Block," Flying (June 1980), pp. 26-27; F. M. Sand and M. L.
Balinski, of Econ, Inc., The Allocation of Runway Slots by Auction, vols. I,
Il, III, Final Report, (April 1900), done under contract to Federal Aviation
Administration, Office of Aviation Policy; and David M. Grether, P. Mark Isaac
and Charles R. Plott, of Polinomics Research Laboratories, Inc., Alternative
Methods of Allocating Airport Slots: Performance and Evaluation (August
TS73), Prepared by the Civil Aeronautics Board.



valued to a high valued use reduce the amount of services available to
society that society values most, and thus, such restrictions impose a
cost on society.

There are a number of changes in the Present allocation/assignment/
technical regulation system that have been Suggested. All of then are
deregulatory in the sense that they give users more choices and they put
more emphasis on decisions made in markets, and less emphasis on
government regulation. Implicit in such deregulatory moves is the
observation or the belief that (a) users of the spectrum know what is
best for themselves; (b) the profit or income earning motive will drive
people to make more economically efficient use of any resource including
the spectrum;15/ (c) there is no reason to believe that a government
agency can judge better than users what those users want. All of the
Spectrum deregulatory proposals also involve (d) recognizing that the

frequency spectrum is a scarce resource that has economic value and

pay Conomic efficiency means that a given output of goods or services is
Produced at the lowest real cost in terms of all inputs used. Technical
efficiency refers to producing the maximum output per some unit of input. For
example, it may be technically efficient to carry on as many mobile radio
conversations as possible per megahertz using narrow band FM or single side
band, trunking and cellular techniques, all of which use sophisticated
electronic equipment in order to use the spectrum intensively. It may also be
economically efficent to use such sophisticated systens in major urban centers
where the current demand for spectrum apparently exceeds the supply of
Spectrum. However, in low population rural areas where there is often an
excess supply of spectrum, it may be economically efficient to use old

inexpensive, wide band FM or very wide band AM equipment, which is Dot
technically efficient. :


“56

reallocations only consider apparent current demand, there is no
guarantee that there may not be some other higher value current or future
alternative use that is not even considered by the Commission.

Once frequencies have been allocated to particular kinds of users,
the Commission then makes assignments based upon (1) first come-first
served, (2) comparative hearings; or (3) unlimited entry and unlimited
sharing.

In many broadcasting and common carrier services where there is
sufficient spectrum available so that one assignment does not preclude
another in the same location, or where there is an excess supply of
frequencies (which is true in most rural areas today) the rule has been
to assign frequencies on a first come-first served basis. Thus, in these
uncontested cases, whoever gets to the Commission first and meets the
appropriate eligibility requirements will get a license.

In the case of broadcasting licenses in urban areas and some common
carrier point-to-point microwave and mobile radio and MDS licensees, and
very likely in the case of satellite orbital slots in the future, the
Commission faces an excess demand situation. The number of applicants
exceeds the number of channels available (under the existing allocation
table and rules and given the fact that there is no explicit price placed
on spectrum use) for those applicants. There may be several applicants
for a single channel, or there may be several channels, but still more
applicants than channels available. In either case, the Commission

generally holds comparative hearings to determine the “best" applicant


channel. Undoubtedly, there are many other possible examples.
(G) Allowing All or Most Users Much More Flexibility in the Kinds of

Permissible Communications

Many classes of licensees are limited in Permissible Communications
or classes of users. For example, amateur Operators may not conduct

business; citizen band Operators must be 18 years old. Many kinds of

and unrelated to the Sound being broadcast ; television Stations may not
sell or lease their right to control the channel, etc. 33a/ Undoubtedly
there are many more examples, If Many of these restrictions were
repealed, users Could engage in other innovative kinds of Communications,
Could use the Spectrum more efficiently, and could earn additional

revenues or profits,

337 Notice of Tn wiry, Proposed Rule Making and Order in Gen Docket 80-112,
‘adopted March TS, TSE? released May 2, Toe, FCC 80-136,


-25-

In addition to dividing up frequencies, areas and time, licensees
could be allowed to combine frequencies, areas or time. Thus, for
example, if three mobile radio users gach had exclusive use of adjacent
channels in a particular city, they could be allowed to share all three
frequencies and develop their own trunked system. Or, if the three users
each had 25 KHz channels, they would be free to combine their channels to
get 75 KHz, but use 15 KHz equipment so they ended up with 5 rather than
3 channels.

The idea, of course, is that within the constraints of their license
rights, licensees would have much more freedan in how to use the
channel. Their only obligation might be to notify the Commission of what
they were doing. These kinds of changes are clearly within the
Commission's authority under the 1934 Act.

(E) Allowing Users Maximum Technical Flexibility and Hence Repealing

Most Technical Requirements Except Those That Affect Interference

The Commission sets large numbers of technical requirements. Some,
such as those that concern bandwidth, harmonic frequency suppression,
transmitter power and antenna height may be necessary to prevent
interference. When the Commission assigns multiple users to share the
same channel without giving any individual user an exclusive license it
may also be necessary to establish other standards to allow the systems

to be compatable (or to establish rules that allow users to agree upon


current system Section IV then discusses a number of deregulatory
changes that have been Proposed. That js followed by a brief discussion
in Section V of some of the objections that have been raised to spectrum
deregulation. Finally, there is a brief Concluding section. There are
also four appendices that Provide a list of questions to be asked
concerning any Spectrum deregulation change, examples of three recent FCC
Spectrum deregulation Proposals, a list of all the recent major spectrum

deregulation Proposals, and a glossary of some commonly used terms.

TI, The Current Frequency Spectrum Management Systen

The frequency Spectrum is allocated international ly by the
International Tel ecommunicat ions Union (ITU). The ITU allocations plus

treaty agreements with nearby countries (especially Canada and Mexico)

¥ Recording to the 1973 table of allocations, about 60% of the spectrum

Tow 1 GHz was listed as non Federal government, about 23% was exclusively
Federal government, and about 16% was shared. However, in 1973 for al]
frequencies below 100 GHz, about 19% was listed as exclusively Nnon-Federa}
government, about 20% was exclusively Federal government, and the remaining

61% was shared. See: Office of Telecommunicat ions Policy, The Radio

Frequency Spectrum: United States Use and Management ‘(January 1973), Pp. D-1
to D-IT,



I. Introduction

This paper represents an attempt to describe that series of
concepts that have become know as “spectrum deregulation" or sometimes
“spectrum economics." It is important to note that spectrum deregulation
is highly controversial because many licensees believe that it only
refers to having the government charge license fees or use auctions to
distribute licenses. Thus those licensees believe that "spectrum
economics" only means they will now have to pay for the right to use the
spectrum that they received "for free" in the past. Many licensees are
also afraid that spectrum deregulation implies that they would lose much
of their existing spectrum or would have a smaller probability of
obtaining additional spectrum in the future.

As this paper will indicate, however, auctions and fees are only two
of the possible techniques and not necessarily the most important
techniques for decreasing the amount of government intervention in
licensee use of the spectrum. Moreover, many existing licensees
presently pay a high price to use the spectrum, but it is the indirect
and often hidden legal and engineering price of obtaining and keeping an
FCC license. Spectrum deregulation does imply more reliance on market
forces and less reliance on government decision making; it also implies
giving licensees more freedom to decide how much spectrum they would like
to use (and are willing to pay to use or sell the right to use if they do
not want it).

Section Il of this paper briefly describes the current frequency

management system. Section III discusses some of ‘the problems with the


-14.

Should command @ positive price; 16/ (e) allowing users to have certain

explicit (al though limited) use rights in the Spectrum; and (f) allowing

(3) Limiting the use of petitions to deny;

(4) Allowing (but Dot requiring) users to share their assignments in
time, space and frequency, and also allowing then to Subdivide and
Combine discrete channels or frequencies;

(5) Allowing users maximum technical flexibility and hence repealing
most technical requirements except those that affect interference;

167 DougTas W. WebBink, “The Value of the Frequency Spectrum Allocated to
Specific Uses," IEEE Transact ions in Electromagnetic Compatibility, EMC-19
(August 1977), pp. S51.

17/ There are writers who disagree with much of this analysis. See: William
1. Melody, “Radio Spectrum Allocation: Role of the Market," American Economic
Review Papers and Proceedings: 70 (May 1980), pp. 393-397; @ viTiam A.

as th,
Allocation," A Study of the Feasibility of Applying the Opportunity Cost
Concept to the Spectrum Allocation Process, for Department of Communications ,
Ottawa, Canada, Contract No. 0SU77~00368 March 1978,


-4-

terrestrial microwave routes and excess Supply S/ of Spectrum in low
Population rural areas. When nationwide allocations are made, generally
the same technical Standards are set nationwide, even though spectrum may

be far more valuable in urban than in rural areas.

Substitutes.7/ Similarly, Private radio users such as taxi cab
Companies, power Companies, Petrol eum companies, forest product
companies, etc. each have separate allocations below 800 MHz,

Generally, allocations and reallocations are made without
considering other Possible future alternative uses of the spectrum. For
example, when television Channels 70 to 83 (806 MHz to 890 MHz) were
reallocated to Jand mobile use, it was a forgone conclusion that those .
Channels would be used for land mobile Purposes (as opposed to satellite,

Point to point communications, etc.) 8/ Because allocations and

exceeds the Quantity demanded (given existing prices and existing al locations
and technical rules.) Excess supply implies that the price is above the
equil ibriun Price; i.e., Price is “too high," or that the use of the resource
has in some way been artificially restricted.

2/ Notice of Proposed Rulemaking in Gen. Docket 80-183, adopted Apri 24,
1980; released May 8, 1980, FCC 8-231"

8/ Second Report and Order in Docket 18262, 46 F.c.c, 2d 752 (1974); and
Memorandum Opinion and Order in Docket 18262, 51 F.C.C. 2d 945 (1975),



~20-

Act may not allow such transfers, but it is at least arguable that the
Commission could, through a rule making proceeding, come to a general
finding that such transfers without prior approval are in the public
interest .24/ In any case, even if Commission approval of transfers is
unambiguously required by the Act, transfer approval could be made even
more routine, simple and fast and on del egated authority to the Bureau
Chiefs.

One other important aspect of freer transferability of licensees is
that in order to make efficient allocation and reallocation decisions the
Commission needs information it does not currently collect on the value
of the spectrum in alternative uses. Therefore, one important piece of
data the Commission could collect that it does not necessarily require
today is the Price of the transfer. A comparable example is the county
Court house that registers a transfer of land title and the price paid,
but otherwise has no control over the transfer (although the new owner,

Tike the seller is required to observe existing zoning regulations).

247" Section SI0(d) of the Communications Act of 1934 states that:

"No construction permit or station license, or any rights
thereunder, shall be transferred, assigned, or disposed
of in any manner, voluntarily or involuntarily, directly
or indirectly, or by transfer of control of any
Corporation holding such permit or license, to any person
except upon application to the Commission and upon
finding by the Commission that the public interest,
convenience, and necessity will be served thereby.”




-43-

APPENDIX A

Questions to Ask Concerning Any Spectrum Deregulatory Change

For any existing or proposed service it is useful to ask a number of

questions including the following:

(a)

How restrictive are existing rules? For example do they restrict:

who is eligible to use the service (only businessmen?); how the service

may be used (only for broadcasting purposes?); or (c) what technology may

be used (only 25 KHz FM modulation?). What are the benefits and the

costs of removing those restrictions? More specifically:

(1)

(2)

(3)

(4)

Would it be possible and would it be desirable to establish a
spectrum property use right for the use of the necessary license for
this service? Can property rights be established based upon
existing input rights as currently defined by Commission rules? Can
property rights be established based on output rights?

Would it be desirable to allow users to buy and sell their licenses

and can any existing antitrafficking rules be abolished?
Would it be desirable to limit the ability of parties to

file petitions to deny? Would it be desirable to limit further the
impact of the Carroll Doctrine?

Should users be allowed (but not required) to share and/or resell
their assignments in time, space or frequency -- and -allowed to earn
unregulated profits from that sharing? Should users be allowed to
combine channels?


IIl. Problems With The Current System

Many individuals have criticized the existing allocation and
assignment techniques.9/ Those criticisms are based upon the observation
that many allocation and assignment actions do not lead to the most
efficient use of the spectrum because they do not take into account the
economic motives of businessmen and consumers. Economic motives (profit
making or income earning motives) cause individuals and business to
operate in ways that increase individual economic welfare or well-being
and economic efficiency in general and hence the nation's output of goods
and services. The possibility that individuals can increase their income
and companies can increase their, profits creates powerful incentives for

them to work hard and to seek new innovations that will allow them to

97 See, for example: Joseph Philip Woodward, “A Market Pricing Method For
Spectrum Allocation," MS Thesis, Naval Postgraduate School, Monterey,
California, March 1980; Mathtech, Inc., and Telecommunications Systems,
Economic Techniques for Spectrum Management: Final Report, by Carson Agnew,
ionald A. Dunn, Richa’ . Gould and Robert D. Stibolt, a study prepared for
the National Telecommunications and Information Administration, December 20,
1979; Remarks of Carlos V. Roberts before the 14th Annual Meeting of the
National Association of Business and Educational Radio, Hershey, Pennsylvania,
duly 12, 1979; Testimony of Nina W. Cornell and Stephen J. Lukasik before the
Senate Subcommittee on Communications; Committee on Commerce, Science and
Transportation on S. 611 and S. 622; June 18, 1979; Nina W. Cornell,
“Frequency and Orbit," chapter 13 in Seyom Brown, Nina W. Cornell, Larry Le
Fabian and Edith Brown Weiss, Regimes for the Ocean Outer Space, the Weather
(Washington, 0.C.: The Brookings Institution, > PP- -156; John 0.
Robinson, An Investigation of Economic Factors in FCC Spectrum Management, FCC
Office of Chief Engineer, Spectrum ocations Staff, Report No. =01,
August 1, 1976; John Otto Robinson, "Introduction of Economic Factors Into
Spectrum Resource Management," MA Thesis, University of Pennsylvania,
Annenberg School of Communications, 1974; Harvey J. Levin, The Invisible
Resource: Use and Regulation of the Radio Spectrum (Baltimore: The Johns
lopkins Press, ; Nicholas Johnson, “lowers 0 Babel: The Chaos in Radio
Spectrum Utilization and Allocation," Law and Contemporary Problems , XXXIV
(Summer, 1969), pp. 505-534.



-6-

(unless one or more applicants drop out or reach Sharing or Joint venture
or other agreements with the other applicants),

In Contrast, in most Of the services regulated by the Private Radio

anyone to receive exclusive use of a frequency, Basically, what the
Commission has done to avoid comparative hearings in the private radio

Services is to allow unl imited Sharing. This means that each new


-39-

become more involved in private contracts).44/ Certain firms that have
received use of large amounts of spectrum at little or no direct cost may
also be made worse off. Firms that have been prevented fran getting
access to the spectrum or who have received less spectrum than they would
have been willing to pay for will be made better off. So will firms that
would like to adopt new technologies, share their spectrum, etc. So too
will firms that would like to pay a high price to accept less
interference and congestion or a low price to accept more interference
and congestion than current Commission rules allow.

D. International Treaties Restrict Spectrum Market Options in the U.S.

ITU allocations and International treaties restrict
the number of options available in terms of use of the spectrum such as
restrictions on maximum power, etc. Nevertheless, many of the spectrum
market options mentioned above are possible within the current ITU rules
and international treaties. Most of the frequency spectrum only allows
line of sight transmission, so that only border countries are affected by
most U.S. spectrum use decisions.45/ In any case, as long as U.S.
Spectrum users abide by international regulations, foreign countries
should not be concerned about how U.S. users are selected, or who the

specific users are.

a7 See the remarks of Carlos V. Roberts before the 14th Annual meeting of
the National Association of Business and Educational Radio, Hershey,
Pennsylvania, December 20, 1979.

45/ Satellite transmission presents one of the most complex problems, since
Many countries are potentially affected by any U.S. satellites, and there
appears to be excess demand for certain satellite orbital slots.


-27-

systems in the private radio service.32/ Most common carriers are
required to publish tariffs, and Commission rules sometimes limit the
numbers of entrants. In contrast, private radio users who have
cooperative sharing arrangements are not allowed to resell] their
services, at least for a profit. There are also restrictions on
automatic interconnection of private mobile radio systems to the wire
line telephone network. Such restrictions may not serve a useful
purpose, other than to make the two services legally distinguisable.
Similarly, television broadcasting, MDS, ITFS, OFS, TV translators, and
CATV are all substitutes for each other, but each is subject to different
regulations. 32a/

Another partial deregulatory change would be to allow licensees that
are primarily classified as one kind of service also to provide other

kinds of services on the same channel. The recent MDS docket Proposed to

327 In National Association of Regulator Commissioners v. F.C.C., 525 F. 2d.
$30 (1976), the U.S. Court of Appeals for the District of Columbia held that
“...we find nothing in the record on the common carrier definition to cast
doubt on its [FCC's] conclusions that SMRS are not common carriers. If
practice and experience show the SMRS to be common carriers; then the
Commission must determine its responsibilities from the language of the Title
II common carrier provisions." This is an important case because it leaves
Open the future possibility that the court might find these private radio
systems to be common carriers. It is also important because some private
radio rules are designed to ensure that private radio licensees are legally
distinguishable from common carrier licensees, and some of the private radio
rules substantially restrict user options.

32a/ A recent Commission staff report argues that all video services beyond
conventional VHF and UHF television are substitutes and are in the same

market. See: FCC, Office of Plans and Policy, Staff Report on: Policies for
Regulation of Direct Broadcast Satellites by Florence 0. Setzer, Bruce A.
ranca ai ina W. Corne eptember

0), pp. 11-32.


(6)

(7)

(8)

(9)

Should users be al lowed flexibility in the kinds of Pernt ssible
communications (business vs hobby; short time period vs Tong period;
1 way vs 2-way Communications, voice vs data, etc.)?

exclusive appl ication cases? At the same time, can restrictions on
the use of other frequencies be reduced? Conversely, is there an


Nationwide compatability, users Could be allowed to choose their own

Standards (for example, FM vs aM vs SSB vs digital). Nationwide

always impose costs On some users, Even if Nationwide Compatability is
desired, voluntary standards allow users more flexibility than do
mandatory Standards,

(F) Repealing Many of the Artificial Regulatory Distinctions Between

Common Carriers, Broadcasting and Private Radio Use Including

Restrictions on Types of Services, Kinds of Users. and the Right to

Earn_a Profit

——Arofit

Another Major deregulatory idea, and one that is quite Controversja]
and likely to generate substantial Tegal challenge would be to repeal


-3-

frequencies to particular kinds of uses and classes of users.2/ Within
any particular allocation, the FCC then licenses particular users for
specific frequencies or groups of frequencies. The licensing process is
called the assignment process. In addition to allocation and assignment,
the FCC also sets many kinds of technical regulations or standards.
These regulations include rules on signal strength, bandwidth, mode of
emission (FM, AM, single side band), distortion in the signal, etc.
Radio licenses typically specify at least a center frequency, a
bandwidth, allowable modes of emission, an area of signal coverage and
hours of operation. Most licenses, except for daytime AM radio
broadcasting licenses are good 24 hours a day.3/

Most FCC allocations are made nationwide, although there are an
increasing number of exceptions.4/ Thus, Commission allocations and
other rules rarely draw distinctions between excess demand 5/ for the

spectrum in high population ‘density urban centers and along heavily used

ee: vonn 0. Robinson, "Spectrum Allocation and Economic Factors in FCC
Spectrum Management ," IEEE Transactions in Electromagnetic Compatibility, EM-
19 (August 1977), pp. 182-190.

3/ Most licenses indicate the area of coverage either by specifying maximum
transmitter power and antenna height, or by specifying an area of protection
from interference or a minimum distance between two transmitters on the same
frequency.

4/ For example, FCC Rules allow sharing of TV channels 14-20 for land mobile
purposes in 13 markets onl currently MDS channel 2 is allocated in the top
50 markets only.

5/ Excess demand for spectrum means that quantity of licenses demanded
exceeds the quantity of spectrum available (at current prices and under
current allocation and technical rules). Excess demand implies that the price
js below the equilibrium price; i.e., price is "too low."


-17-

may share the sane frequency, and thus may have little or no individual
incentive to increase the technical efficiency of their spectrum use.

Hence one necessary deregulatory change in the private radio
services (if the other changes described below were to be instituted)
would be to begin issuing exclusive licenses or at least to specify
maximum loading or sharing levels which may only be raised with
permission of the existing licensees, and fot unilaterally by the
Commission.19/ (Of course, the Commission has traditionally not issued
exclusive private radio licenses because it wished to avoid mutually
exclusive applications and the apparent need for comparative hearings).
It should also be noted that this property rights proposal for private
radio users is quite controversal. Many private radio users oppose it
because they fear they will lose the ability to get access to additional
channels.

Frequency coordination such as is done by terrestrial
point-to-point microwave and satellite earth stations represents another
kind of property rights system that functions today. Since the first
licensee has the right to refuse or to negotiate to allow later
applicants in a particular area if they might interfere with his signal,
the initial licensee does have a clear (but limited) economic property

Pty) One possibility that has been specifically suggested for the private
radio band would be to give certain users an exclusive "band assignment" of
wider than usual bandwidth (for example 500 KHz) and let the user choose his
own technical standards, loading levels, etc. See: Donald A. Dunn and Bruce
M. Owen, "Policy Options in Mobile Radio Spectrum Management," a report
Prepared under a contract with the Federal Communications Commission,
September 1978. :


-34.

J) Instituting Spectrum Fees

of the Spectrum so that the more Spectrum licensees use, the higher is
the fee they have to pay.42/ Because Spectrum fees require the
Commission to set fees by a formula that takes into account class of

licensee, location, bandwidth, area of Coverage, etc., it will be

2
gust 29° > 80-496,

42/ Much has been written on the Charging of user fees by the government.
ee, for example: U.S. General Accounting Office, The Con res
Consider Explori Opport:

unities to Expand
arges by Federa yencies, (Mar " > neo; Fred Le OTsor
arg or Non-Fishery lational Resources in the United States," a Paper
Prepared for the Works!

‘hop on Foreign Fees, Washington, 0.C., June 22-23, 1978;

U.S, Senate, Committee on Environment and Public Works, Pollution Taxes
Effluent Char es and Other Alternatives for Pollution Control, A Report
prepar. yt AVironmental a ational Resources Olicy Division of the
Congressional Research Service of the Library of Congress, 95th Cong., Ist
Sess., May 1977, Serial No. 95-5; US, Gene i
AP ropriati

'y

3 Charles Stewart Ferre > y Duties 6
under the Public Land Trust," Michigan Law Review, 75
(January 1977), Pp. 586-626; Public Land Law Review Comisston, User Fees and
Charges for Public Lands and Resources, (Springfield, VA: National Technicat
nformation ervice, December » PB=195~846, For legal arguments against
In BS Decemb 1970)

Service, “Legal Analysis of Radio Spectrum Use Changes," Prepared at the
request of Senator Goldwater, (April 1979),



-35-

Since markets establish prices (often many different prices) for
thousands or millions of separate transactions depending upon supply and
demand conditions in different locations, it is doubtful if not
“impossible that any formula can adequately take into account all the
relevant information. Hence, one can expect many legal challenges from
any attempt to institute such fees. Indeed, all of the comments filed by
Commission licensees in this proceeding opposed spectrum fees - and only
a few non-licensees supported the idea. It is at least doubtful that the
Independent Offices Appropriations Act of 1952, 31 U.S.C. 383a., would
allow the Commission to collect spectrum fees that greatly exceeded the
Commission's operating budget.

An auction has the advantage over fees that users decide how much
they wish to bid, rather than having the government attempt to set fees
by administrative fiat. Thus it would be much harder for a losing
applicant to win a court appeal in an auction than for a group of
applicants to appeal "unreasonable" spectrum fees. It is at least
questionable whether the Communications Act of 1934 allows the Commission
to conduct an auction. Hence, new legislation may be needed for an

auction; although only a court test will tell for certain.

V. Arguments Against Spectrum Deregulation

A. Wealthy, Large or Monopoly Firms Will Obtain All the Spectrum

Some people have argued that large firms, monopoly firms or the
wealthy will obtain all the spectrum if various market mechanisms replace

much of the Commission's administrative allocation and assignment


-50.

APPENDIX D
GI ossary

Allocation: The commitment Of bands or blocks of frequencies to the use of a
Specific service or Services,

Assignment: The selection and authorization (licensing) of the use of

Carrol} Doctrine, Carrol} Broadcasting ve F.C.C., 258 F, 2d. 440 (D.C. Cir,

1958). The idea that the FCC should be concerned about €conomic harm done to

existing stations from some action that allows in new competitors.

Dunn - Owen Band Assignment Proposal: The Proposal by Donald Dunn of Stanford

Plans, channel bandwidths, emission Modes, etc. see: Donald A. Dunn and
Bruce M, Owen, "Policy Options in Profile Spectrum Management ,“ @ report
Prepared under Contract with the Federal Communications Commission, September

Excess Demand: When the quantity demanded of any good or Service exceeds the
aeESS_Vemand:

quantity Supplied at the existing Price. Whenever there are Shortages or Tong
waiting lines for any good or Service, [e.g., for gasoline] that is an

indication of excess demand.


-23-

(D) Allowing, But Not Requiring, Users to Share Their Assignments in

Time, Space and Frequency, and Also Allowing Them to Subdivide and

Combine Discrete Channels or Frequencies
If users had a clear property right in their license, and the

freedom to share or combine frequencies they would have the opportunity
to use the spectrum more efficiently and to earn larger profits.

For example, the Commission now allows but does not require FM
broadcasting stations to broadcast a second signal, their SCA (subsidiary
communications authorization) or to broadcast in stereo. Assuming that
interference is not caused to others outside the assigned channel or
area, this deregulatory proposal would allow the FM station to broadcast
as many other SCA type signals as it wished within its assigned channel
and to sell or lease that channel for any possible use to anyone it
chooses. Similarly, if a television station can include other signals or
data in its vertical blanking interval or any other part of its assigned
bandwidth the idea would be to allow but not require it to do so.

One way to share the spectrum is by sharing the bandwidth. Another
way is time sharing. Thus, the idea would be to allow, but not require,
a station to let someone use its channel (and even its transmitter) to
transmit some other kind of signal during some part of the day.28/

Recently, the Commission allowed Western Union to time share with the

287 This was proposed for ITFS, MDS and OFS systems in the Notice of Tayi ny a

Proposed Rulemaking and Order in Gen. Docket 80-119, adopted Marc > >
released May 2, TSEO para. 51.


IL
Il.
Ill.
IV.

vy.

TABLE OF CONTENTS

Introduction... eee eee ee ee eee eee reese
The Current Frequency Management System. .. +++ +++
Problems With The Current System... 2 2 ee ee ee ee
Deregulatory Changes... 2 22 ee eee ere eee eee

A. Insuring That Users Have a Clear and
Unambiguous Property Right... -. ++ eee ee eee

B. Allowing Users To Transfer Their License To Any
Qualified Applicant (Abolishing Most or All
Antitrafficking Rules) . 2 + ee ee eee eee eee

C. Limiting the Use of Petitions to Deny. ..-. +s +e

D. Allowing, But Not Requiring, Users To Share
Their Assignments in Time, Space and Frequency,
and Also Allowing Them To Subdivide And Combine
Discrete Channels Or Frequencies .. 2... eee eee

E. Allowing Users Maximum Technical Flexibility And
Hence Repealing Most Technical Requirements
Except Those That Affect Interference... . ++ ++ «

F. Repealing Many Of The Artificial Regulatory
Distinctions Between Common Carrier, Broadcasting
And Private Radio Use Including Restrictions On
Types Of Services, Kinds of Users, and the Right
To Earn A Profit . 22 6 eee eee eee eee eee

G. Allowing All Or Most Users Much More Flexibility
In The Kinds of Permissible Communications .....-

H. Reducing The Number Of Separate Classes Of Services. .

1. Avoiding The Use Of Comparative Hearings And Instead
Using Auctions, Lotteries Or Expedited Paper Hearings.

J. Instituting Spectrum Fees. . 2 2 ee see ee wees
Arguments Against Spectrum Deregulation .. ++ ++ ++ es

A. Wealthy, Large Or Monopoly Firms Will Obtain ~
All The Spectrum... 6. eee ee eee eee eee

ll

1

18

25

29

30

35

35


to) Repealing most remaining distinctions between broadcasting Stations,
Common carrier and Private radio systems.

Of all the Proposals the one that Currently appears to be the most

difficult to make workable is:

° Instituting Spectrum fees,


E. Much of the Spectrum is Shared Between Uses Allocated to Federal

Tt is true that there is much Shared spectrum {although there is
also much Spectrum that is not shared), Nevertheless, that sharing does
not preclude the FCC from introducing market mechanisms, in the shared as
well as the not shared Parts of the Spectrum. Users of FCC allocated
Spectrum would simply have to abide by whatever agreements re} ate to
shared Spectrum.

F. Auctions and Fees Are Inflationary

To the extent that auctions and fees cause the spectrum to be used
more efficiently ang hence increase Us. productivity, they are not
inflationary, Indeed, they may Cause the true cost of using the Spectrum
to fall, rather than to rise, as new technologies are introduced and idle
Spectrum is Put to use. It is also important to realize that valuable

comparative hearings, and fend off Petitions to deny, those Tegal and
engineering Costs would be much smaller, In any Case, for economic
efficiency reasons it is important that Prices reflect the true costs of

using resources, even if in the Short run market mechanisms do Cause the


-10-

point-to-point microwave systems) have developed more efficient methods
of time and frequency sharing that allow them to transmit many additional
Conversations on a given bandwidth.

In addition, without an explicit price being attached to the
Spectrum, there is no objective way for the Commission to choose among
Competing uses of the spectrum, (TV vs. land mobile; satellite VS.
terrestrial microwave), and Competing applicants, The Conmunicat ions Act
directs the Commission to make a finding of Public interest, convenience
and necessity before issuing a license or allowing an existing license to
be transferred, The result of this process is that the Commission is
often required to decide what is the best use of a frequency or which
user would best meet the Public interest. There is, in other words, a
“wise man" theory of regulation. An important, Perhaps even critical
assumption is that the agency is capable of deciding what is best for the
public, Certainly, the desires of Consumers need not be the same as
those of the regulatory agency. Moreover, there are many different
consumers, each one of which may have different wants from any other
consumer. A regulatory agency may find it particularly difficult to
weigh the Strength of different consumer's wants, something that economic
markets do particularly well.11/

In addition, the allocation process takes years (witness the now

More than 12 year delay in using most of the channels relocated in the

117 See: Notice of In wiry and Proposed Rulemaking in the matter of
Deregulation of Radio, a Docket TSBT3: 73 F.C.Ce S4 457 (1979),


-52.

Spectrum Use Rights: The right to choose how one wishes to use the spectrum

over which one has control. Spectrum use rights imply the Tight to use the
Spectrum in many different ways, including renting, leasing or selling some
Portion of that right (for part Of the day, part of the area Covered, part of
the frequency, the remainder of a license tern, etc).

Technical Efficiency of Spectrum Use: Obtaining the most Signals or bits of



-12-

factory. 13/ Note, however, that not all land will wind up holding
factories, because as more farm land is transformed to factory use, some
of the remaining land will become more valuable for farm use.

Thus, one fundamental economic concept is that in general the
fewer restrictions that are Placed upon’ transactions among producers and
Consumers, the better off will society be.

The Communications Act of 1934 indicates in Section 1 that the
Commission was “created for the Purpose of regulating interstate and
foreign commerce in communication by wire and radio SO as to make
available, so far as Possible, to all the People of the United States a
rapid, efficient, nation-wide, and world-wide wire and radio
Communication service with adequate facilities at reasonable
charges..."14/ This part of the Act may be read as encouraging economic
efficiency in the use of the frequency Spectrum.

In the context of Spectrum use this concept of maximun freedan in
transactions implies that there should be as few restrictions as possible
on spectrum use and on transfers of licenses fran one Party to another.

Any rules that restrict a license from being transferred from a low

@ resource in its next best alternative use. Opportunity cost of a
hickory tree in the back yard may be the value of the lumber that could be
obtained if the tree were cut down. Hence, if one keeps the tree for
decoration, one Gives up the value of the lumber. Similarly, the Opportunity

BEY Economists talk about the Spportunity cost of a resource as the value of

in its best alternative use, which may be for another television station, or
may be for land mobile Communications purposes. :

14/ Communications Act_of 1934, as amended through November 2, 1978, 47
U.S.C Sec. (1934),


. The FCC Office of Plans and Policy's Working Paper Series presents
staff analysis and research in various states. These papers are intended to
stimulate discussion and critical canment within the FCC, as well as outside
the agency, on issues in telecamunicat ions policy. Titles may include
preliminary work and progress reports, as well as canpleted research. The
analyses and conclusions in the Working Paper Series are those of the authors
and do not necessarily reflect the views of other members of the Office of
Plans and Policy, other Cannission staff, or the Commission itself. Given the
preliminary character of same titles, it is advisable to check with authors

before quoting or referencing these working Paper in other publications.

Copies may be purchased from the International Transcription Services, InCer
FCC, 2100 M Street, N.W., Roan 140, Washington, D.C. 20037, (202) 857-3800.
Copies are also available fran The National Technical Information Service,
§285 Port Royal Road, Springfield, VA 22161 (703) 487-4650). The inside back
cover contains a list of previous titles.

For information on the Series, contact the Office of Plans and Policy, Federal
Communications Commission, Roan 822, 1919 M Street, N.W., Washington, D.C.
20554, (202) 653-5940.


-33-

Another alternative to the comparative hearing procedure that has
been used in the past is a first come-first served process that limits
the number of entrants so that there is little or no possibility of
mutually exclusive applications. This may be done in two ways. The
first is to make entry requirements so restrictive that only a few
applicants are eligible (e.g., only the local wire line common carrier
may apply). The second is to establish a fast cut off procedure (e.g.,
only applications received within 30 days will be processed) .40a/

The problem with both of these procedures is that in order to
prevent mutually exclusive applications they purposely limit the amount
of potential entry and competition. Thus, the potential user who has the
most valuable possible use may nevertheless be excluded from even
applying for a license. Hence, once again a particularly important
correlary to both cut off procedures and limits on entry is that
“winners" have the right of resale and sharing. Moreover, from the point
of view of economic efficiency, auctions and lotteries are clearly
preferable to cut off procedures or limits on eligibility. Auctions and
lotteries with resale allow the license to go to the person that values
it the most, whereas cut off procedures and eligibility limits may

prevent spectrum use by precisely the person to whom it is most valuable.

a7 The Commission recently ordered that all domestic satellite applications
which were received before the cut-off date would be processed as a group

before any new applications would be processed. Memorandum Opinion and Order
in the matter of processing of pending space applications in the domestic
fixed satellite service, adopted April 24, 1980, released April 28, 1980, FCC
80-230,


-21-

(C) Limiting the Use of Petitions to Deny

Petitions to deny may be filed with respect to initial license
applications, license renewals and license transfers.25/ If one accepts
the idea that it is desirable and in the public interest to speed up the
process and lower the cost of licensing applicants and to allow free
transferability of licenses, then anything that slows or prevents initial
licensing and license transfers may not be in the public interest. Most
petitions to deny are filed by competitors that want to prevent the entry
of new firms or new services or by organizations that want a fraction of

the profits or capital gains from the service, or that want some special

257 Section 309 (d)(1) of the Communications Act of 1934 states
‘that:

"Any party in interest may file with the Commission a
petition to deny any application (whether as originally
filed or as amended) to which subsection (b) of this
section applies at any time prior to the day of
Commission grant thereof without hearing or the day of
formal designation thereof for hearing; except that with
respect to any classification of applications, the
Commission from time to time by rule may specify a
shorter period (no less than thirty days following the
issuance of public notice by the Commission of the
acceptance for filing of such application or of any
substantial amendment thereof), which shorter period
shall be reasonably related to the time when the
applications would normally be reached for processing.
The petitioner shall serve a copy of such petition on the
applicant. The petition shall contain specific
allegations of fact sufficient to show that the
petitioner is a party in interest and that a grant of the
application would be prima facie inconsistent with
subsection (a)."


FREQUENCY SPECTRUM DEREGULATION ALTERNATIVES
Douglas W. Webbink */
October 1980

*7 Deputy Chie?, Office of Plans and Policy.

7 The views expressed are those
Of the author and do not necessarily represent those of the Commission or its
staff. I wish to thank Jim Brown, Nina Cornell,

Phil Gieseler, Jack Robinson
Mike Marcus, Alan McKie and John Williams for helpful comments and
suggestions.


(10)

(11)

(12)

(13)
(14)

(15)

-45-

If auctions are used to select applicants, are oral auctions or
sealed bids preferable? How should bid payments be structured? For
example, should bidders pay one lump sum payment upon winning the
auction, or should they make equal installment payments over the
period of the license?

If lotteries are used to select applicants should there be any
eligibility requirements to enter the lottery? What rules are
Necessary to preserve the integrity of the lottery and insure that
the selection process is truly random?

Under what circumstances do the benefits exceed the costs of
limiting the number of applicants through restrictive eligibility
requirements or using a fast cut off procedure?

Would it be desirable to institute spectrum fees?

If spectrum users paid directly for the use of the spectrum (to the
Federal Government or to other private users), to what extent would
those spectrum users have an incentive to switch to non radiating
technologies (such as fiber optics or coaxial cable)? Would it be
desirable to create incentives for that kind of change?

Can these proposed changes be instituted under existing Commission
authority? If changes are necessary and desirable in the
Communications Act of 1934, what is the minimum legal change that
will accomplish the desired goal? What are the legal risks involved
in attempting the proposed changes under the existing Communications
Act?


-29-

(H) Reducing the Number of Separate Classes of Services

Until Docket 18262 reallocated UHF television channels 70-83
to landmobile use the Commission had traditionally used separate block
allocations for many different classes of private radio users that are
subject to different kinds of rules such as those listed in (E), (F) and
(G) above. The private radio SMR concept (special mobile radio) in the
new 800 mHz band is an important move in the direction of breaking down
many of those separate blocks. Any eligible private radio business user
may subscribe to an SMR.34/ Thus, unlike lower frequencies, at 800 MHz
there are not separate allocations for petroleum, forest products,
business radio, special industrial users, manufacturers, motor carriers,
taxicabs, etc. That deregulatory concept could be expanded to all
private radio mobile services at all frequencies. Docket 18262 still
separates common carriers and private radio systems. In contrast, Docket
18261 allowed sharing of UHF television channels 14-20 with land mobile
users in the top 13 markets.35/ The recent MDS allocation item proposes
allowing ITFS, MDS and OFS systems to have access to the same
channels.36/ That concept could be expanded to many other ‘services.
Undoubtedly, there are many other examples where the Commission could
reduce the number of separate service classes and the number of separate

block allocations.

347" Memorandum Opinion and Order in Docket 18262, 51 F.C.C. 2d 945 (1975).

35/ Fifth Report and Order in Docket 18261, 48 F.C.C. 2d 360 (1974); see also
the earlier orders in this docket.

36/ Notice of pe ry Proposed fulemaking and Order in Gen. Docket 80-112,
adopted Marcl * 3 released May 2, *



enforcing spectrum use rights are Rot trival. Nevertheless, broadcasting
Station spectrum rights based on input rights (transmitter Power, antenna
height, ang antenna directionality) exist today. Many broadcast ing
Stations and their spectrum rights (that is, their licenses) are traded

with Commission Permission each year. With Commission approval common

a strong incentive to buy a license, since it has always been Possible to
obtain a new private radio license from the Commission.

While it may be Somewhat more difficult to establish Spectrum output
rights (based on predicted, not necessarily actual signal strengths or

Some individuals and firms. Spectrun market mechani sms place more
reliance on individual choice, agreements and Contracts and less reliance

on Commission administrative processes, Therefore, individuals and firms


=24-

Public Broadcast ing Stations satellite earth stations that Western Union
had supplied to those Stations.29/

A third kind of Sharing is area sharing. If the FCC rules Specify a
distance of 170 miles between Co-channel VHF Ty Stations or 75 miles

between co-channel land mobile Stations, the idea would be to allow but

Stations, as Yong as the new station did not Cause interference to other
Stations beyond that permitted by Commission rules.

In some ways these proposals are very similar to al lowing
unregulated and unrestricted resale and Shared use of wireline common
Carrier services, The Commission has proposed or has found that such
resale and Sharing makes consumers better off by leading to lower prices
and/or new or better Services. 30/

In each of these cases, the Commission would allow but not require
Such sharing. While not required to Share, existing licensees would have
the incentive to engage in such sharing since they would have the right
to any revenue and Profits received fron allowing other users to share

their frequency, time or area.

297 Memorandum Opinion Order Authorization and Certificate,
File W-P-C-2334, Sanur 30, 1980.

30/ See: Notice of Pro josed Rulemaking in the matter of Regul atory Policies
Toncerning esale a ared Use ommon Carrier Internationa}
Communications Services, CC Docket 80-176, 77 F.c.c, 2d 831 (1980); Notice of
Proposed Rulemakin in the matter of Resale and Shared Use of Common arrier
Domestic Pub ic Switched Network Services, CC Docket 80-54, 77 F.c.c. 2d 274
(1980); Report and Order in the matter of Regulatory Policies Concerning

Resale and Share: Se€ OF Common Carrier Services and Facilities, Docket
20097, 60 Fcc 24 261 (1976),



-8-

increase their return for a given expenditure of time and materials.
However, in order for users to have such economic incentives, they must
have economic Property rights, that is the right to Control a resource or
@ service including the right to decide how to use the resource, to make
@ profit from it's use and the right to Share, lease or sell that right

to others. Users of the frequency Spectrum do not receive explicit

the right to sell their Spectrum use right (i.e., their radio license)
without Commission Permission. Many users are not allowed to share their
license in time, area, or frequency with other users and earn a profit
through that Sharing. What incentive, for example, does a land mobile
user have to buy equipment that would allow him or her to carry on twice
as many conversations by splitting channel bandwidth, if he or she will
dust lose one of those channels to other users with no Compensat jon?9a/
It is important to understand that an economic property right. does
not necessarily imply legal Ownership. Economic Property rights imply

the use of the Spectrum. If one rents an apartment, prevents someone
else fran erecting a tall building that blocks out sunlight or legally

emits pollution into a river, one is exercising a Property right.

3a7 Recently the Commission Proposed to allow, but not require land mobile
Use N

users to use new narrower band technologies. Notice of Inquiry in PR Docket
80-440, adopted August 1, 1980, released September 9, T9380, ret 80-484.


-46-

APPENDIX B

Examples of Recent FCC Spectrum Deregulation Proposals

A. Multipoint Distribution Service

Existing Situation: MDs licensees have 6 or 4 MHz bandwidth

allocations. One 6 MHz channel is available throughout the country, and a

second 6 MHZ channel is available in the largest 50 cities. A4 MHZ channel
is available instead of the second 6 MHz channel throughout the country
outside the 50 largest cities.

MDS channels may be used to transmit TV signals, data, etc. There
are many competing applicants for the one or two 6 MHZ MDS allocations
currently available in many cities.

Commission Proposals:
(1) Reallocate 31 ITFs Channels to make them avai] able for ITFS, MDS or

OF S.46/

(2) Use Auctions, Lotteries or Expedited Paper hearing procedures for

MDS mutually exclusive Situations.47/

(3) Allow freer tranferabi1 ity of MDS licensees. 48/

587 Notice of Tnguiry, Pro josed Rulemaking and Order in Gen. Docket No. 80-
Ti2, "adopted March 1 T3EDs Feleased May 2, T9380; FCC 80-136,

47/ Notice of Inquir and Proposed Rulemaking in CC Docket 80-116, adopted
March 15, 1980; released May 2, 1980; FCC Baal.

48/ Notice of Inquir: and Proposed Rulemakin in CC Docket 80-116, adopted
March 15, 1980; released May 2, 1980; FCC Beta


48.

APPENDIX ¢

Memorandum Opinion and Order in Docket 18262, (reallocated UHF-Ty Channels 70-

83 and established special mobile radio Service), 51 F.c.c, 2d 945 (1975) and

Second Report and Order in Docket 18262, 46 F.c.c, 2d 752 (1974),

Notice of Inquiry in the Matter of Fee Refunds and Future FCC Fees, Gen.
Docket 78-316, 69 F.c.c, 2d. 741 (1978),

Notice of Proposed Rulemaking and Inquiry in Gen. Docket 79-188, (Xerox XTEN),

adopted August 1, 1979, released August 29, 1979, Fcc 79~464,
Order in Dockets 20567, 20568, 20569, (Greater Media Radio Company), adopted
August 1, 1979, Fcc 79-401,

“News: FCC Instructs Staff to Prepare Decision Selecting Broadcast Licensee
by Use of Lottery," (Dockets 20567-69), Report No. 15650, May 30, 1980,

First Report and Order _in the Matter of Domestic Receive-Only Satellite Earth

Stations, cc Docket No. 78~374, 74 F.C.C. 2d 205 (1979),

(Cellular Communications Systems), adopted November 29, 1979, Fcc 79-774,

Alternative Procedures in Choosing Applicants for Radio Aut hori zations in the
Multipoint Distribution Service), adopted March 19, 1980; released May 2,
1980, Fcc 80-141,

Notice of Inquiry, Proposed Rule Making and Order in Gen. Docket No. 80-112,
(ITFs, MDS, OFS reallocation), adopted March 19, 1980; released May 2, 1980,
Fcc 80-136, 45 Fed. Reg. 29323,



-ll-

landmobile Docket 18262).12/ When there are competing applications,
there may be additional years of delay in actually granting licenses.

The regulatory process is often inflexible and can not respond quickly to
technological change, because of the Administrative Procedure Act
requirements for due process. A major problem with the traditional
regulatory allocation and assignment process is that it makes it easy for
existing licensees to block or at least slow entry by competitors.
Petitions to deny and competing applications are often filed by
competitors or persons who want a percent of the profits, even though
such petitions may be anticompetitive or may raise the costs of providing

services desired by consumers.

TV. Deregulatory Changes

Unrestricted or minimally restricted economic markets tend to
allow resources to move fran lower valued to higher valued uses.
Whenever resources move from a lower valued to a higher valued use,
economic efficiency is increased. If a particular piece of land is more
valuable for use in building factories than in growing vegatables, it is
because consumers value the products of the factory more than they value
the farm products. Thus, if no restrictions are placed on the use of

that particular piece of land it will eventually wind up holding a

127 Docket T6262 was opened in 1968. As of 1980, most of the reallocated
spectrum had not yet been made available for assignment to any particular
user.