Spectrum Management: Preliminary Findings on Federal Relocation Costs and Auction Revenues
Released: 2013-04-24T00:00:00

Letter

Background

The radio frequency spectrum is the resource that makes possible wireless communications and supports a vast array of government and commercial services. DOD uses spectrum to transmit and receive critical voice and data communications involving military tactical radio, air combat training, precision-guided munitions, unmanned aerial systems, and aeronautical telemetry and satellite control, among others. The military employs these systems for training, testing, and combat operations throughout the world. Commercial entities use spectrum to provide a variety of wireless services, including mobile voice and data, paging, broadcast television and radio, and satellite services.

In the United States, FCC manages spectrum for nonfederal users under the Communications Act, while NTIA manages spectrum for federal government users and acts for the President with respect to spectrum management issues as governed by the National Telecommunications and Information Administration Organization Act. FCC and NTIA, with direction from Congress and the President, jointly determine the amount of spectrum allocated for federal, nonfederal, and shared use. FCC and NTIA manage the spectrum through a system of frequency allocation and assignment.

Allocation involves segmenting the radio spectrum into bands of frequencies that are designated for use by particular types of radio services or classes of users. (Fig. 1 illustrates examples of allocated spectrum uses, including DOD systems using the 1755-1850 MHz band.) In addition, spectrum managers specify service rules, which include the technical and operating characteristics of equipment.

Assignment, which occurs after spectrum has been allocated for particular types of services or classes of users, involves providing users, such as commercial entities or government agencies, with a license or authorization to use a specific portion of spectrum. FCC assigns licenses within frequency bands to commercial enterprises, state and local governments, and other entities. Since 1994, FCC has used competitive bidding, or auctions, to assign certain licenses to commercial entities for their use of spectrum. Auctions are a market- based mechanism in which FCC assigns a license to the entity that submits the highest bid for specific bands of spectrum. NTIA authorizes spectrum use through frequency assignments to federal agencies. More than 60 federal agencies and departments combined have over 240,000 frequency assignments, although 9 departments, including DOD, hold 94 percent of all frequency assignments for federal use.

Congress has taken a number of steps to facilitate the deployment of innovative, new commercial wireless services to consumers, including requiring more federal spectrum to be reallocated for commercial use. Relocating communications systems entails costs that are affected by many variables related to the systems themselves as well as the relocation plans. Some fixed microwave systems, for example, can use off-the-shelf commercial technology and may just need to be re-tuned to accommodate a change in frequency. However, some systems may require significant modification if the characteristics of the new spectrum frequencies differ sufficiently from the original spectrum. Specialized systems, such as those used for surveillance and law enforcement purposes, may not be compatible with commercial technology, and therefore agencies have to work with vendors to develop equipment that meets mission needs and operational requirements.

In 2004, the Commercial Spectrum Enhancement Act (CSEA) established a Spectrum Relocation Fund, funded from auction proceeds, to cover the costs incurred by federal entities that relocate to new frequency assignments or transition to alternative technologies. The auction of spectrum licenses in the 1710-1755 MHz band was the first with relocation costs to take place under CSEA. Twelve agencies previously operated communication systems in this band, including DOD. CSEA designated 1710-1755 MHz as “eligible frequencies” for which federal relocation costs could be paid from the Spectrum Relocation Fund. In September 2006, FCC concluded the auction of licenses in the 1710- 1755 MHz band and, in accordance with CSEA, a portion of the auction proceeds is currently being used to pay spectrum relocation expenses.

In response to the President’s 2010 memorandum requiring that additional spectrum be made available for commercial use within 10 years, in January 2011, NTIA selected the 1755-1850 MHz band as the priority band for detailed evaluation and required federal agencies to evaluate the feasibility of relocating systems to alternative spectrum bands. DOD provided NTIA its input in September 2011, and NTIA subsequently issued its assessment of the viability for accommodating commercial wireless broadband in the band in March 2012. Most recently, the President’s Council of Advisors on Science and Technology published a report in July 2012 recommending specific steps to ensure the successful implementation of the President’s 2010 memorandum. The report found, for example, that clearing and vacating federal users from certain bands was not a sustainable basis for spectrum policy largely because of the high cost to relocate federal agencies and disruption to the federal missions. It recommended new policies to promote the sharing of federal spectrum. The sharing approach has been questioned by CTIA—The Wireless Association and its members, which argue that cleared spectrum and an exclusive-use approach to spectrum management has enabled the U.S. wireless industry to invest hundreds of billions of dollars to deploy mobile broadband networks resulting in economic benefits for consumers and businesses.

Some Agencies Underestimated 1710- 1755 MHz Band Relocation Costs, Although Auction Revenues Appear to Exceed Those Costs

Some Federal Agencies Underestimated Relocation Costs

Actual costs to relocate communications systems for 12 federal agencies from the 1710-1755 MHz band have exceeded original estimates by about $474 million, or 47 percent, as of March 2013. The original transfers from the Spectrum Relocation Fund to agency accounts, totaling over $1 billion, were made in March 2007. Subsequently, some agencies requested additional monies from the Spectrum Relocation Fund to cover relocation expenses. Agencies requesting the largest amounts of subsequent transfers include the Department of Justice ($294 million), the Department of Homeland Security ($192 million), the Department of Energy ($35 million), and the U.S. Postal Service ($6.6 million). OMB and NTIA officials expect the final relocation cost to be about $1.5 billion compared with the original estimate of about $1 billion. Total actual costs exceed estimated costs for many reasons, including unforeseen challenges, unique issues posed by specific equipment location, the transition timeframe, costs associated with achieving comparable capability, and the fact that some agencies may not have properly followed OMB and NTIA guidance to prepare the original cost estimate. NTIA reports that it expects agencies to complete the relocation effort between 2013 and 2017.

Although 11 of the 12 agencies plan to spend the same amount or more than they estimated, DOD expects to complete the 1710-1755 MHz transition for about $275 million, or approximately $80 million less than its cost estimate. DOD’s cost estimates, some made as early as 1995, changed over time as officials considered different relocation scenarios with differing key assumptions and their thinking evolved about the systems that would be affected, according to DOD and NTIA officials. Cost estimates to relocate military systems from the late 1990s and early 2000s ranged from a low of $38 million to as much as $1.6 billion, depending on the scenario. DOD’s final cost estimate to relocate from the band was about $355 million. DOD officials told us that the relocation of systems from the 1710-1755 MHz band has been less expensive than originally estimated because many of its systems were simply re-tuned to operate in the 1755-1850 MHz band.

Auction Revenues Appear to Exceed Agency Relocation Costs

The auction of the 1710-1755 MHz band raised almost $6.9 billion in gross winning bids from the sale of licenses to use these frequencies. This revenue minus the expected final relocation costs of approximately $1.5 billion suggests that the auction of the band will raise roughly $5.4 billion for the U.S. Treasury. As mentioned above, NTIA reports that it expects agencies to complete the relocation effort between 2013 and 2017; therefore, the final net revenue amount may change. For example, the Department of the Navy has already initiated a process to return almost $65 million to the Spectrum Relocation Fund.

DOD’s Preliminary Cost Estimate Substantially or Partially Met GAO’s Identified Best Practices, but Changes in Assumptions May Affect Future Costs

DOD’s Preliminary Cost Estimate for Relocating from the 1755-1850 MHz Band Substantially or Partially Met GAO’s Identified Best Practices

DOD’s Office of Cost Assessment and Program Evaluation (CAPE) led the effort to prepare the department’s preliminary cost estimate portion of its study to determine the feasibility of relocating its 11 major radio systems from the 1755-1850 MHz band. To do so, CAPE worked closely with cost estimators and others at the respective military services regarding the technical and cost data needed to support the estimate and how they should be gathered to maintain consistency across the services. The services’ cost estimators compiled and reviewed the program data, identified the appropriate program content affected by each system’s relocation, developed cost estimates under the given constraints and assumptions, and internally reviewed the estimates consistent with their standard practices before providing them to CAPE. CAPE staff then reviewed the services’ estimates for accuracy and consistency, and obtained DOD management approval on its practices and findings. According to DOD officials, CAPE based this methodology on the cost estimation best practices it customarily employs.

We reviewed DOD’s preliminary cost estimation methodology and evaluated it against GAO’s Cost Guide, which also identifies cost estimating best practices that help ensure cost estimates are comprehensive, well-documented, accurate, and credible. These characteristics of cost estimates help minimize the risk of cost overruns, missed deadlines, and unmet performance targets:

A comprehensive cost estimate ensures that costs are neither omitted nor double counted.

A well-documented estimate is thoroughly documented, including source data and significance, clearly detailed calculations and results, and explanations for choosing a particular method or reference.

An accurate cost estimate is unbiased, not overly conservative or overly optimistic, and based on an assessment of most likely costs.

A credible estimate discusses any limitations of the analysis from uncertainty or biases surrounding data or assumptions.

DOD officials developed the preliminary cost estimate as a less-rigorous, “rough-order-of-magnitude” cost estimate as outlined by NTIA, not a budget-quality cost estimate. Because of this, we performed a high-level analysis, applying GAO’s identified best practices to DOD’s cost estimate and methodology, and did not review all supporting data and analysis.

Overall, we found that DOD’s cost estimate was consistent with the purpose of the feasibility study, which was to inform the decision-making process to reallocate 500 MHz of spectrum for commercial wireless broadband use. Additionally, we found that DOD’s methodology substantially met the comprehensive and well-documented characteristics of reliable cost estimates, and partially met the accurate and credible characteristics.

Comprehensive—Substantially Met: We observed that DOD’s estimate included complete information about systems’ life cycles, an appropriate level of detail to ensure cost elements were neither omitted nor double-counted, and overarching study assumptions that applied across programs. However, some programs did not list all the discrete tasks required for relocation, and not all the individual programs had evidence of cost-influencing ground rules and assumptions.

Well-documented—Substantially Met: We found that management reviewed and accepted the estimate, the estimate was consistent with the technical baseline data, and documentation for the majority of programs was sufficient that an analyst unfamiliar with the program could understand and replicate what was done. However, the documentation also captured varying levels of detail on source data and its reliability, as well as on calculations performed and estimation methodology used, some of which were not sufficient to support a rough-order-of-magnitude estimate.

Accurate—Partially Met: We found that DOD properly applied appropriate inflation rates and made no apparent calculation errors. In addition, the estimated costs agreed with DOD’s prior relocation cost estimate for this band conducted in 2001. However, no confidence level was specifically stated in DOD’s cost estimate to determine if the costs considered are the most likely costs, which is required to fully or substantially meet this characteristic.

Credible—Partially Met: We observed that DOD cross-checked major cost elements and found them to be similar. However, some sensitivity analyses and risk assessments were only completed at the program level for some programs, and not at all at a summary level. Performing risk assessments and sensitivity analyses on all projects and at the summary level is required to fully meet this characteristic, and is required on a majority of projects and at the summary level to substantially meet this characteristic.

As the Assumptions Supporting DOD’s Cost Estimate for Relocating from the 1755-1850 MHz Band Change, Costs May Also Change

Even though DOD’s preliminary cost estimate substantially met some of our best practices, as the assumptions supporting the estimate change over time, costs may also change. According to DOD officials, any change to key assumptions about the bands to which systems would move could substantially change relocation costs. Because decisions about the time frame for relocation and the spectrum bands to which the various systems would be reassigned have not been made yet, DOD based its current estimate on the most likely assumptions, provided by NTIA, some of which have already been proven inaccurate or are still undetermined. For example:

Relocation bands: According to DOD officials, equipment relocation costs vary depending on the relocation band’s proximity to the current band. Moving to bands further away than the assumed relocation bands could increase costs; moving to closer bands could decrease costs. In addition, congestion, in both the 1755-1850 MHz band and the potential bands to which its systems might be moved, complicates relocation planning. Also, DOD officials said that many of the potential spectrum bands to which DOD’s systems could be relocated would not be able to accommodate the new systems unless other actions are also taken. For example, the 2025-2110 MHz band, into which DOD assumed it could move several systems and operate them on a primary basis, is currently allocated to commercial electronic news gathering systems and other commercial systems. To accommodate military systems within this band, FCC would need to withdraw this spectrum from commercial use to allow NTIA to provide DOD primary status within this band, or FCC would have to otherwise ensure that commercial systems operate on a non-interference basis with military systems. FCC has not initiated a rulemaking procedure to begin such processes.

Relocation start date: DOD’s cost estimate assumed relocation would begin in fiscal year 2013, but no auction has been approved, so relocation efforts have not begun. According to DOD officials, new equipment and systems continue to be deployed in and designed for the current band, and older systems are retired. This changes the overall profile of systems in the band, which can change the costs of relocation. For example, a major driver of the cost increase between DOD’s 2001 and 2011 relocation estimates for the 1755-1850 MHz band was the large increase in the use of unmanned aerial systems. DOD deployed these systems very little in 2001, but their numbers had increased substantially by 2011. Conversely, equipment near the end of its life cycle when the study was completed may be retired or replaced outside of relocation efforts, which could decrease relocation costs.

Inflation: Inflation will drive up costs as more time elapses before the auction occurs.

In addition to changing assumptions, the high-level nature of a rough- order-of-magnitude estimate means that it is not as robust as a detailed, budget-quality lifecycle estimate, and its results should not be considered or used with the same confidence. DOD officials said that for a spectrum- band relocation effort, a detailed, budget-quality cost estimate would normally be done during the transition planning phase once a spectrum auction has been approved, and would be based on specific auction and relocation decisions.

No Government Revenue Forecasts Exist for a Potential Auction of the 1755- 1850 MHz Band, and a Variety of Factors Could Influence Auction Revenues

Federal Agencies Have Not Produced a Revenue Forecast for the 1755-1850 MHz Band

No official government revenue forecast has been prepared by CBO, FCC, NTIA, or OMB for a potential auction of the 1755-1850 MHz band licenses, but some estimates might be prepared once there is a greater likelihood of an auction. Officials at these agencies knowledgeable about estimating revenue from the auction of spectrum licenses said that it is too early to produce meaningful forecasts for a potential auction of the 1755-1850 MHz band. Moreover, CBO only provides written estimates of potential receipts when a congressional committee reports legislation invoking FCC auctions. OMB officials said NTIA, with OMB concurrence, will transmit federal agency relocation cost estimates to assist FCC in establishing minimum bids for an auction once it is announced. OMB would also estimate receipts and relocation costs as part of the President’s budget. OMB analysts would use relocation cost information from NTIA to complete OMB’s estimate of receipts.

Although no official government revenue forecast exists, an economist with the Brattle Group, an economic consulting firm, published a revenue forecast in 2011 for a potential auction of the 1755-1850 MHz band that forecasted revenues of $19.4 billion for the band. We did not evaluate the accuracy of this revenue estimate. Like all forecasts, the Brattle Group study was based on certain assumptions. The study assumed that the 1755-1850 MHz band would be generally cleared of federal users. It also assumed the AWS-1 average nationwide price of $1.03 per MHz-pop as a baseline price for spectrum allocated to wireless broadband services, and that the 1755-1780 MHz portion of the band would be paired with the 2155-2180 MHz band, which various industry stakeholders currently support. The study assumed that the 95 MHz of spectrum between 1755 and 1850 MHz would be auctioned as part of a total of 470 MHz of spectrum included in 6 auctions sequenced 18 months apart and spread over 9 years with total estimated net receipts of $64 billion. In addition, the study adjusted the price of spectrum based on the increase in the supply of spectrum over the course of the six auctions, as well as for differences in the quality of the spectrum bands involved.

A Variety of Factors Could Influence Auction Revenues

Like all goods, the price of licensed spectrum, and ultimately the auction revenue, is determined by supply and demand. This fundamental economic concept helps to explain how the price of licensed spectrum could change depending on how much licensed spectrum is available now and in the future, and how much licensed spectrum is demanded by the wireless industry for broadband applications. Government agencies can influence the supply of spectrum available for licensing, whereas expectations about profitability determine demand for spectrum in the marketplace.

Supply. In 2010, the President directed NTIA to work with FCC to make 500 MHz of spectrum available for use by commercial broadband services within 10 years. This represents a significant increase in the supply of spectrum available for licensing in the marketplace. As with all economic goods, the price and value of licensed spectrum are expected to fall as additional supply is introduced, all other things being equal.

Demand. The expected, potential profitability of a spectrum license influences the level of demand for it. Currently, the demand for licensed spectrum is increasing and a primary driver of this increased demand is the significant growth in commercial-wireless broadband services, including third and fourth generation technologies that are increasingly used for smart phones and tablet computers. Some of the factors that would influence the demand for licensed spectrum are:

Clearing versus Sharing: Spectrum is more valuable, and companies will pay more to license it, if it is entirely cleared of incumbent federal users, giving them sole use of licensed spectrum; spectrum licenses are less valuable if access must be shared. Sharing could potentially have a big impact on the price of spectrum licenses. In 2012, the President’s Council of Advisors on Science and Technology advocated that sharing between federal and commercial users become the new norm for spectrum management, especially given the high cost and lengthy time it takes to relocate federal users.

Certainty and Timing: Another factor that affects the value of licensed spectrum is the certainty about when it becomes available. Any increase in the probability that the spectrum would not be cleared on time would have a negative effect on the price companies are willing to pay to use it. For example, 7 years after the auction of the 1710- 1755 MHz band, federal agencies are still relocating systems. The estimated 10-year timeframe to clear federal users from the 1755- 1850 MHz band, and potential uncertainty around that timeframe, could negatively influence demand for the spectrum.

Available Wireless Services: Innovation in the wireless broadband market is expected to continue to drive demand for wireless services. For example, demand continues to increase for smartphones and tablets as new services are introduced in the marketplace. These devices can connect to the Internet through regular cellular service using commercial spectrum, or they can use publicly available (unlicensed) spectrum via wireless fidelity (Wi-Fi) networks to access the Internet. The value of the spectrum, therefore, is determined by continued strong development of and demand for wireless services and these devices, and the profits that can be realized from them.

Chairman Udall, Ranking Member Sessions, and Members of the Subcommittee, this concludes my prepared remarks. I am happy to respond to any questions that you or other Members of the Subcommittee may have at this time.

GAO Contacts and Staff Acknowledgments

For questions about this statement, please contact Mark L. Goldstein, Director, Physical Infrastructure Issues, at (202) 512-2834 or goldsteinm@gao.gov. In addition, contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this statement include Mike Clements, Assistant Director; Stephen Brown; Jonathan Carver; Jennifer Echard; Emile Ettedgui; Colin Fallon; Bert Japikse; Elke Kolodinski; Joshua Ormond; Jay Tallon; and Elizabeth Wood.

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