After eighteen-months of deliberation, the Federal Communications Commission yesterday adopted rules governing the 600 MHz incentive auction and spectrum-aggregation proceedings.  These hard-fought orders, which the Democrat-controlled FCC adopted over vigorous dissents from the two Republican Commissioners, Ajit Pai and Michael O’Reilly, provide a solid foundation for at least one competitive carrier to acquire low-band spectrum in the upcoming incentive auction without the risk of the largest two carriers shutting the smaller carriers out of the bidding in key markets.  The rules also helpfully modify the FCC’s “spectrum screen” to apply additional regulatory scrutiny to future transactions involving below 1 GHz spectrum.

While the full text of the rules will not be released until next week, FCC Chairman Tom Wheeler described the new rules as nothing short of “epic.” 

“The approach we just approved is a turning point on our approach to the incentive auction,” he said.  “Nobody has ever done this before in the world.”  Following the “arduous” process of adopting incentive auction and spectrum aggregation rules, Wheeler said he hoped to turn his attention to convincing the broadcast industry to participate in this “once-in-a-lifetime opportunity” to “reconceptualize” their business. 

The FCC’s rules establish a reverse auction for the FCC to recapture broadcast spectrum and a forward auction that allows the FCC to sell broadband spectrum licenses in the 600 MHz band.  The two auctions are closely connected: the amount of spectrum acquired in the reverse auction will depend on the amount of revenue raised in the forward auction, and the amount of spectrum sold in the forward auction will depend on the amount of spectrum acquired in the reverse auction. 

In the forward auction of broadband licenses, the FCC intends to establish a reserve block of licenses, where eligibility will be limited to only those bidders with limited low-band spectrum holdings.  Significantly, however, the reserve blocks do not come into existence until after revenue passes a certain “threshold” level sufficient to (a) pay broadcasters who are selling their stations; (b) relocate those broadcasters who remain; and (c) fund any remaining obligations owed to the First Responder Network Authority. 

Once auction revenues meet this threshold, the FCC will separate the broadband licenses into two categories: (1) unreserved, which are open to all bidders, and (2) reserved, which are only open to non-nationwide carriers and carriers with less than 45 megahertz of low-band, below 1 GHz spectrum in a given geographic area.  Assuming the forward auction satisfies the threshold revenue objectives necessary to bring the reserve licenses into being, the eligibility rules for the reserve licenses effectively prevent bidding on reserved blocks in about one-third of the country for AT&T and about five-sixths of the country for Verizon.  T-Mobile, Sprint, and all other carriers will be able to bid on unreserved and reserved blocks in every market in the country. 

The precise amount of reserve spectrum available varies depending on how much spectrum is recaptured from the broadcast industry, according to the following schedule:

70 MHz or more cleared = 30 MHz reserve 60 MHz cleared = 20 MHz reserve 50 MHz cleared = 10 MHz reserve 40 MHz cleared = 10 MHz reserve

Under the rules, a single bidder can generally win all of the reserve spectrum; however, if only one bidder is actively competing for reserved blocks when the threshold is met, the reserve-eligible bidder would be limited to a maximum of twenty megahertz of spectrum.  If, for example, the FCC clears 70 MHz of spectrum and establishes a 30 MHz reserve block but has only one bidder demanding the licenses at the time the threshold is met, the one active bidder could not acquire more than 20 megahertz of spectrum even though the rules would allow up to 30 MHz of reserve spectrum if there were competitive bidding for it. 

As to the overall spectrumscreen, which is the general test for determining excessive concentration of spectrum, the FCC has incorporated nearly all of the high-band Broadband Radio Service (BRS) and Educational Broadband Service (EBS) spectrum into its screen rather than discounting this spectrum through weighting or some other mechanism.  As a result, the new rules saddle Sprint, which has extensive holdings in these bands, with additional high-band spectrum and provide little room for Sprint to acquire spectrum without additional regulatory scrutiny from the FCC.  At the same time, the rules grant AT&T, Verizon, and T-Mobile with additional leeway for further spectrum acquisitions without triggering additional regulatory scrutiny under the screen. 

Notably, moreover, neither the incentive auction nor the spectrum aggregation item rests on a finding that Verizon, AT&T, or any other carrier has “market power,” which is an important concept in competition law that generally calls for robust intervention in the market.  “The record in this proceeding,” the FCC staff noted in their presentation to the Commissioners, “does not support a finding of market power for any carrier.” 

Finally, Chairman Wheeler and several of the Commissioners repeatedly stressed that the rules adopted today are based on the “current market structure.”  As the Chairman explained in his press conference following the meeting, any major change or transaction among the four national carriers would constitute a change in market structure and could result in markedly different rules for both the incentive auction and the spectrum aggregation limits adopted today. 

The full text of today’s decision will not be made available until next week in part due to the length and complexity of these orders.  (The incentive auction item alone is said to exceed 400 pages and contain more than 2000 footnotes.)  Today’s incentive auction order also presages at least one major auctions procedures notice, which will seek comment on precisely how some of the mechanisms discussed above will function in the context of the 600 MHz incentive auction.