As noted in our recent advisory on this subject, the FCC adopted procedures for next year’s scheduled incentive auction at its open meeting on Aug. 6. The FCC has now released the details in a 156-page Public Notice, describing how the reverse and forward auctions will be conducted. This advisory describes the procedures that relate to the “reverse” auction, in which the FCC will buy back broadcast licenses in order to free up spectrum in the 600 MHz band for wireless mobile broadband operations.

As we previously described, the FCC will offer increasingly lower bids in each round to full power and Class A TV stations until it is determined that the stations remaining in the auction are needed to clear the spectrum required for the mobile broadband “forward” auction. At least sixty days prior to the deadline for stations to decide whether they want to participate in the reverse auction, the FCC will advise stations of the opening bids they will receive for each of the following three options:

  1. Relinquishment (which means either going off the air or giving up a channel in order to share a channel with another station);
  2. A UHF or high (channels 7-13) VHF station agreeing to move to a low (channels 2-6) VHF channel; or
  3. A UHF station agreeing to move to a high VHF channel.

Prior to the start of the auction, each station will have to decide which of these options it is willing to consider. During the auction, a station may move from 1 to 2 or 3; or from 2 to 3; but not backwards. In other words, once a UHF station says it is willing to move to a high or low VHF channel, but not to go off the air, it cannot go back to choosing relinquishment as an option in a later round.

The FCC has decided that the highest opening bid price to be offered to any UHF station for relinquishment will be $900 million, provided to the station that creates the most interference and covers the greatest population. All other stations will be offered a proportionally lower price based equally on population covered and interference caused by that station. Some stations may be advised before the auction even begins that they are not needed in the auction and cannot participate.

The FCC has also decided that the total price paid for a UHF station to move to a high VHF channel and for a high VHF channel to move to a low VHF channel and for a low VHF channel to go off the air collectively should equal the price of a UHF channel going off the air, since the end result is the same (i.e. one station going off the air). Accordingly, a UHF station proposing to move to a low VHF channel will receive 75% of the amount it would get for going off the air, and a low VHF station would receive 25% of that amount for going off the air. A UHF station proposing to move to a high VHF channel would receive 40% of the off-air bid, while a high VHF channel would get 60% of that amount for going off air, but only 35% for moving to a low VHF channel.

After the initial pre-auction applications have been completed, the FCC will advise each station whether or not they are qualified to participate in the auction. They may not be qualified either because their choice of auction options (e.g., a UHF station that will only consider moving to a high VHF channel) could not be accommodated, or because the station is simply not needed for the forward auction, regardless of the option chosen.

During the auction, the FCC will advise bidding stations of the availability of alternative channels in their existing band (UHF or VHF), a so-called “vacancy index,” that will help stations determine if bids are likely to continue decreasing in future rounds. For UHF stations, if fewer than three UHF channels are available for repacking, the vacancy index will be considered “low,” meaning that bids are likely to be frozen soon. On the other hand, if more than six UHF channels remain available, then the vacancy index will be considered “high,” meaning that bids are likely to continue decreasing until more stations drop out of the auction.

For VHF stations, fewer than two remaining VHF channels will be considered a low vacancy index, while more than four remaining VHF channels will be considered a high vacancy index. The FCC is using different standards for VHF and UHF because there are fewer channels in the VHF band.

Although subject to change, the FCC intends to reduce bids by 5% in each round, or by 1% of the opening bid, whichever is greater. However, no station will know which other stations are participating in the auction or how much they have been offered by the FCC unless, of course, the stations are co-owned. Winning stations will not be publicly revealed until after the auction ends.

Although a station’s agreement to accept the current bid offered by the FCC is binding, the FCC’s offer is never binding until the auction ends. After each round, participating stations will be assigned one of the following statuses:

  1. Bidding in the current round (if there are still vacancies available in the station’s current band—UHF or VHF—meaning bids will continue to decrease);
  2. Frozen—provisionally winning (if no channels remain available in the station’s current band);
  3. Frozen—currently infeasible (VHF stations only, if no other VHF channels available. But this status can change in later rounds if UHF stations choosing to move to VHF change options or drop out of the auction);
  4. Frozen—pending catch up (described below);
  5. Exited—voluntarily (stations that dropped out of the auction and can no longer bid); o
  6. Exited—not needed (at any point in the auction, the FCC can determine that a channel will always be available in the station’s current band, at which point the FCC will cease making bids for that station).

The FCC will conduct multiple rounds in the reverse auction until it believes it has the number of channel vacancies it needs, at which point the reverse auction will tentatively end and the forward auction will begin. However, it is possible that the results of the forward auction may reveal that the FCC did not need as many broadcast stations to vacate their channels as originally thought, in which case the FCC will begin a second stage of the reverse auction.

In the second (or later) stage, some of the stations that received provisionally winning bids will find that those bids were not winning bids after all. Rather, the FCC will put them back in active status and lower bids may be forthcoming. Because the bids in the second (or any later) stage may begin at a higher level than where they ended in the previous stage, those stations that had already accepted lower bids will be assigned the status, “frozen—pending catch up,” meaning that they are locked into the lower bids they have already accepted, and that the bids may well go lower as the rounds progress in that later stage, at which point their status will change to “bidding in the current round.” Of course, those stations can always choose to drop out of the auction if the bids get lower than they are willing to accept. However, once a station has exited the auction, it will not be able to re-enter the auction in a later round or stage.

The FCC intends to release an “Application Procedures Public Notice” when it is ready to begin accepting auction applications. That Public Notice will provide instructions and deadlines for completing the pre-auction application, as well as the opening bids to be offered each station for each of the options discussed above. It will also announce minimum opening bids and upfront payments to be made by mobile broadband providers that wish to participate in the forward auction.

Absent an appeal that delays the start of the incentive auction, it remains scheduled to begin March 29, 2016, and the FCC anticipates that it will issue the Application Procedures Public Notice and begin accepting auction applications in the next few months.