Here’s What’s Next For The Spectrum Auction

 Last week, President Obama signed into law legislation authorizing an incentive auction of broadcast spectrum as a means of transferring spectrum from TV to wireless broadband, where the FCC and others policymakers have concluded it will eventually be badly needed.

To get a handle on how the auction would work and what it all means to TV broadcasters, TVNewsCheck Editor Harry A. Jessell spoke with John Hane, a Washington communications attorney with the firm of Pillsbury Winthrop Shaw Pittman.

As Hane sees it, the FCC’s big job is to induce enough stations in the most densely populated areas to give up their spectrum for auction with the guarantee of a definite payoff — a payoff established by a preliminary reverse auction.

He also says that broadcasters who choose to hang on to their spectrum are protected to a certain extent by the safeguards that NAB lobbyists had built into the authorizing language, especially a provision that says the FCC has only one shot at the TV spectrum.

It will take years for a motivated FCC to conduct the necessary rulemakings and implement the auctions, he says. But each broadcaster needs to pay attention to what’s going as the auctions and attendant repacking will shake up the entire TV band. “If I can’t outrun the bear, then I want to outrun the other guy. I want to get the best new assignment in my market,” Hane says.

An edited transcript follows:

Explain how the incentive auction would actually work.

The FCC is going to try to clear broadcasters completely out of the top end of the UHF TV  band so it can create new licenses there. To do that successfully, it needs some stations in the Washington-Boston corridor, the major markets of the West Coast, some border areas and a few other places to be willing to sell their licenses.

So, the first step is for the FCC to get a sense of how many stations in those areas might be willing to sell. It has a lot of ways of figuring that out, but it won’t know for sure until it has run a so-called “reverse” auction. In a normal auction, the seller finds the highest price a buyer will pay. In a reverse auction, the buyer — the FCC — will find out the lowest prices at which stations may be willing to sell their licenses.

For the reverse auction, stations in each geographic grouping will submit bids identifying the lowest price at which they are willing to sell. The FCC will notify each station whether its bid was accepted, and those whose bids were accepted will be obligated to sell after the forward auction.

In the forward auction, the FCC simply sells to the highest bidders, presumably wireless carriers. If all goes well, the forward auction will yield enough money to pay off the broadcasters who participated in the reverse auction, cover the repacking costs of the broadcasters who didn’t volunteer spectrum and still deliver a big check to the treasury.

What happens if the total from the forward auction is less than that from the reverse auction?

The law requires the auction to at least break even. So if the forward auction doesn’t yield enough money, then no TV licenses are reclaimed and no new wireless licenses are issued.

Once the FCC has conducted the reverse auction, it will have enough information to repack the TV band to consolidate and maximize the spectrum available for the forward auction. Is that correct?

Yes. The FCC can’t design the licenses it wants to sell until it knows how much spectrum it can clear. And to figure that out, it has to have a good idea of how many stations are willing to tender; how efficiently it can re-pack remaining stations; and what constraints it will face along the Canadian and Mexican borders.

There’s probably a huge, huge difference in the whole auction depending on whether a half-dozen stations in a few key markets are in or out. The amount of spectrum cleared nationwide would be much greater if 18 stations in New York, Baltimore-Washington and Los Angeles bid versus 12. Those aren’t the only critical markets, but you get the idea. The FCC really needs volunteers in areas of high population density.

What’s involved with the repacking?

Repacking means moving all stations nationwide out of the bands to be auctioned. So you will have repacking even in markets where there was no reverse auction.

Each station that doesn’t sell will be subject to having its license modified. Many or most will receive different channels and many may be assigned different power levels or in some cases even different transmitter sites.

We can only guess at the rough outlines of the auction at this point. The new law gives the FCC a huge amount of flexibility to design both auctions, and allows them to be conducted separately or at the same time.

What do you see as the trickiest part of making this all happen?

A big question is how do you motivate enough stations in and around the big markets to sell at the lowest price?  If you need 10 stations in New York and you just say you’re going to take the lowest 10 bids, then everybody tenders at a high price because they know the FCC is going to be buying a lot of stations and isn’t going to pay more than your bid. So, the FCC might say, for example, that in any given auction it will pay everybody whose bid it accepts the same prince as the highest bid. It’s almost counterintuitive, but that way a station may bid lower in order to increase the chance that its bid its accepted, knowing it will be get the highest payment made to anyone in that geographic area.

How is the FCC going to do all of the repacking and channel switching without disrupting viewing habits as it did in 2009 with the digital transition?

The FCC will need to figure out a transition plan, and that won’t be easy. Although many stations may be able to transition in advance, there will almost certainly be a hard date when a huge, huge number of stations have to make significant changes simultaneously. How do we pull that off?  I have no idea. Who will look out for viewers? I think there’s a perception in Washington that the first transition — and that’s’ what we’re soon going to be calling it — turned out to be underwhelming. Phones didn’t ring on Capitol Hill the next day.

So there is some cockiness there that may not be well founded when we have a huge, nationwide flash cut. I would note as an aside that repacking will seriously complicate efforts to move broadcasting to a new transmission standard unless the standard change happens simultaneously. 

The law includes repacking safeguards for broadcasters who choose not to participate in the auction. It requires the FCC to “make all reasonable efforts” not to diminish the coverage areas of non-participating stations and it prohibits the FCC from moving stations from U to V or from high V to low V. Do you think the safeguards are adequate?

I think the NAB did a good job with the safeguards. The auction proponents wanted provisions that would have been disastrous, and that’s not an exaggeration. Would I like to have seen more safeguards? Of course. The right of stations to protest license modifications — something stations have always had — has been stripped for the repacking. That means you’re going to need some particularly good lawyering and engineering if you think your station was shortchanged. I think we could blow through the $1.75 billion repacking fund long before all claims are satisfied.

Why does the law stipulate that there can be only one auction?

That’s one of the protections. We don’t want to have to go through this over and over. And we want the FCC to design an honest and fair process. If they could do multiple auctions it could be death by a thousand cuts. They could design rules to get channels from truly desperate stations for a pittance, knowing they could come back later. Or they could try some really aggressive approaches. If they got reversed by the court of appeals they could go back and try something else. One auction forces the FCC to really work hard to get it done all at once and means broadcasters don’t have to live under the sword of Damocles, always worried about the next repacking.

You suggested that the $1.75 billion that the law sets aside from auction proceeds to reimburse broadcasters for their repacking costs may be inadequate. Why?

I’m pretty sure a lot of soft costs will go unreimbursed. And I don’t know how the FCC will dole out funds. Do they have to wait until all claims are in?  Do they pay costs as incurred? Do broadcasters have to finance the repacking with their own capital? Will cost of capital be reimbursed? New equipment isn’t free, but neither is the cost of money, and real money will have to be spent. What happens if they run out of money? I understand the need for a cap. The experience of other rebanding processes shows that open-ended cost reimbursement programs don’t work. But I have reservations. 

Instead of reimbursement, a station can opt for a waiver that allows it to use spectrum from non-broadcast purposes. Where did that provision come from and what’s the potential?

That came from the House. It was intended as a benefit, but I’m not sure what it means. Broadcasters already have nominal flexibility subject to a 5% levy on receipts. But this hasn’t proved to have any value. The new language doesn’t expressly say broadcasters can forego reimbursement and implement a different technical standard. I think that’s what the House intended. But it doesn’t say that. So this is another [case] where we have a starting point and we have to help the FCC decide what it means. 

I understand the incentive auction is only available to full-power and class A station. What happens to the other LPTVs.

In legal terms, we call it SOL — statutorily out of luck. LPTVs and translators aren’t eligible to bid in spectrum and they have no protection in repacking. In many cases, there may be plenty of spectrum for translators and LPTVs to relocate, but their relocation costs aren’t likely to be compensated. It’s grim. Congress threw them under the bus.

What does the FCC need to do to implement this? What will the big issues be?

Time, money, supercomputers and good fortune politically. This is a monumentally difficult task, and it will certainly span across at least two administrations. It’s hard to predict the biggest issues, and it will vary with your perspective, whether you’re the FCC, Congress, a wireless operator, a selling broadcaster, a non-selling broadcaster. And it will depend on whether you are in a big market or a small one. One of the biggest challenges in going to be getting Canada and Mexico to cooperate. They don’t need wireless spectrum there, but some stations across the border are going to have to change channels to make this work.

Blair Levin, the principal author of the incentive auction, fears that provisions attached to the auction authority makes a successful auction unlikely because it exposes the FCC to lawsuits from auction losers. What do you think of that?

I’m not sure I agree with Blair. He’s not a middle ground sort of guy, and no doubt he would have written the law very differently. Overall, Congress did a fairly good job of insulating the FCC. There will be many rulemakings, many license modifications and many court challenges. Could the Congress have given the FCC authority to reclaim broadcast licenses with no guidelines? Sure. Would that have expedited auctions and netted more money for the government? Sure. Was that going to happen? Not likely. 

I think Blair should be commended for dreaming really big and getting his big idea passed into law in just a couple of years. If you look back, this was unthinkable when we completed the first transition. It was a hugely audacious proposal without precedent. Now it’s law. I told Blair if he wants to help America he should go to the Department of Agriculture and shake up ag policy like he shook up spectrum policy. I mean it. What he pulled off politically is just remarkable. 

What recourse is there for broadcasters who feel that they have been harmed by repacking despite the safeguards?

I don’t think that’s entirely clear. There may be some legal recourse, but Congress tried to limit that. So, I don’t know how far a direct challenge to a particular reassignment will go. I’m going to tell my clients to stay close to the FCC. This is a classic ounce-of-prevention problem. If I can’t outrun the bear, then I want to outrun the other guy. I want to get the best new assignment in my market.

What happens if the next FCC chairman is not interested in reallocating spectrum from TV to wireless?

She or he could slow-roll the rulemakings or could maneuver them in a way that would set up a failed auction. The FCC is required to evaluate the broadcast band for repacking and reallocation and required to conduct an auction. But even a chairman who wants a successful auction could conceivably screw it up. One who doesn’t want it to happen at all could delay the process, then eventually adopt rules that weren’t likely to lead to a successful auction. If the wireless carriers or even broadcasters who want to sell challenged the rules, it may not be resolved until after the FCC’s incentive auction authority expires. 

Is this likely to happen? I don’t think so. I think the next chairman is likely to move ahead with this. It’s the law and most people are on board with it. But just because it’s the law doesn’t mean it is sure to happen. The FCC is required by Congress to review broadcast ownership rules every four years and relax them as competition grows. It’s required to release annual video competition reports and satellite competition reports. Those things are law. The FCC doesn’t do any of them. 

Can’t the FCC just go ahead and repack the TV band to squeeze out more spectrum on its own authority without conducting an auction? Would such a non-auction repack be subject to the safeguards in the new law?

You mean without conducting incentive auctions? Before the new law passed, the FCC probably could have repacked the broadcast band — in theory anyway. But that has changed. The law gives the FCC one, and only one, shot at repacking, and the repacking safeguards apply to that repacking.