Telecommunications: Preliminary Information on the Federal	 
Communications Commission's Spectrum Allocation and Assignment	 
Process (10-NOV-05, GAO-06-212R).				 
                                                                 
The radiofrequency spectrum is a natural resource used to provide
an array of wireless communications services, such as mobile	 
voice and data services, radio and television broadcasting,	 
radar, and satellite-based services, which are critical to the	 
U.S. economy and national security. Historically, concern about  
interference among users has been a driving force in the	 
management of spectrum. The Federal Communications Commission	 
(FCC)--an independent agency that regulates spectrum use for	 
nonfederal users, including commercial users--and the National	 
Telecommunications and Information Administration (NTIA)--an	 
agency within the Department of Commerce that regulates spectrum 
for federal government users--have worked to minimize		 
interference through the "allocation" and "assignment" of	 
spectrum. Allocation involves designating "bands" of spectrum for
specific types of services or classes of users, such as 	 
designating certain bands for commercial use and others for	 
government use. Assignment provides an authorization or license  
to use a specific portion of spectrum to entities, such as	 
wireless companies. Demand for the radiofrequency spectrum has	 
exploded over the past several decades as new technologies and	 
services have been and continue to be brought to the market in	 
the private sector and new mission needs unfold among government 
users of spectrum, including wireless communications critical for
public safety officials responding to natural and man-made	 
disasters. As a result, nearly all parties are becoming 	 
increasingly concerned about the availability of spectrum for	 
future needs, because most of the usable spectrum in the United  
States has already been allocated to existing services and users.
Therefore, to promote a more efficient use of this resource and  
meet future needs, FCC has increasingly adopted more		 
market-oriented approaches to spectrum management in recent	 
years, including using a competitive bidding process, or	 
auctions, to assign spectrum to commercial users. Prior to	 
auctions, FCC had used comparative hearings, which were 	 
quasi-judicial forums, and lotteries as assignment mechanisms.	 
Since 1994--the first full year FCC was authorized to use	 
auctions--FCC has held 59 auctions for over 56,000 licenses to	 
select between competing applications for the same license or	 
spectrum. The Commercial Spectrum Enhancement Act required us to 
examine FCC's commercial spectrum licensing process and report	 
findings to the committees of jurisdiction by September 19, 2005.
As discussed with the committees of jurisdiction, we examined the
(1) characteristics of the current spectrum allocation process	 
for commercial uses; (2) impact of the assignment process,	 
specifically the adoption of auctions to assign spectrum	 
licenses, on end-user prices, investment, entry and participation
of small businesses, and competition; and (3) options for	 
improving spectrum management.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-212R					        
    ACCNO:   A41317						        
  TITLE:     Telecommunications: Preliminary Information on the       
Federal Communications Commission's Spectrum Allocation and	 
Assignment Process						 
     DATE:   11/10/2005 
  SUBJECT:   Licenses						 
	     Radio frequency allocation 			 
	     Regulatory agencies				 
	     Spectrum						 
	     Spectrum management				 
	     Telecommunications 				 
	     Wireless						 
	     Policies and procedures				 

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GAO-06-212R

November 10, 2005

The Honorable Ted Stevens

Chairman

The Honorable Daniel K. Inouye

Co-chairman

Committee on Commerce, Science, and Transportation

United States Senate

The Honorable Joe Barton

Chairman

The Honorable John D. Dingell

Ranking Minority Member

Committee on Energy and Commerce

House of Representatives

Subject: Telecommunications: Preliminary Information on the Federal
Communications Commission's Spectrum Allocation and Assignment Process

The radiofrequency spectrum is a natural resource used to provide an array
of wireless communications services, such as mobile voice and data
services, radio and television broadcasting, radar, and satellite-based
services, which are critical to the U.S. economy and national security.
Historically, concern about interference among users has been a driving
force in the management of spectrum. The Federal Communications Commission
(FCC)-an independent agency that regulates spectrum use for nonfederal
users, including commercial users-and the National Telecommunications and
Information Administration (NTIA)-an agency within the Department of
Commerce that regulates spectrum for federal government users-have worked
to minimize interference through the "allocation" and "assignment" of
spectrum. Allocation involves designating "bands" of spectrum for specific
types of services or classes of users, such as designating certain bands
for commercial use and others for government use.1 Assignment provides an
authorization or license to use a specific portion of spectrum to
entities, such as wireless companies.

Demand for the radiofrequency spectrum has exploded over the past several
decades as new technologies and services have been and continue to be
brought to the market in the private sector and new mission needs unfold
among government users of spectrum, including wireless communications
critical for public safety officials responding to

United States Government Accountability Office

Washington, DC 20548

1In addition to allocation, FCC also specifies service rules which
include, among other things, the technical and operating characteristics
of equipment.

natural and man-made disasters. As a result, nearly all parties are
becoming increasingly concerned about the availability of spectrum for
future needs, because most of the usable spectrum in the United States has
already been allocated to existing services and users. Therefore, to
promote a more efficient use of this resource and meet future needs, FCC
has increasingly adopted more market-oriented approaches to spectrum
management in recent years, including using a competitive bidding process,
or auctions, to assign spectrum to commercial users. Prior to auctions,
FCC had used comparative hearings, which were quasi-judicial forums, and
lotteries as assignment mechanisms. Since 1994-the first full year FCC was
authorized to use auctions-FCC has held 59 auctions for over 56,000
licenses to select between competing applications for the same license or
spectrum.2

The Commercial Spectrum Enhancement Act required us to examine FCC's
commercial spectrum licensing process and report findings to the
committees of jurisdiction by September 19, 2005.3 As discussed with the
committees of jurisdiction, we examined the (1) characteristics of the
current spectrum allocation process for commercial uses; (2) impact of the
assignment process, specifically the adoption of auctions to assign
spectrum licenses, on end-user prices, investment, entry and participation
of small businesses, and competition; and (3) options for improving
spectrum management. To address these issues, we reviewed and synthesized
relevant economic, legal, and policy-oriented literature, such as the
Spectrum Policy Task Force report, a document produced by FCC staff. In
addition, we hosted, in conjunction with the National Academies, two
expert panels with 23 experts representing academia, government, and
industry. The experts discussed policy issues related to spectrum
allocation and assignment, as well as options for improving spectrum
management in the future. To obtain a range of perspectives on assignment
and allocation issues, we also conducted semistructured interviews with
representatives and officials from academia, government, and industry. We
also analyzed data from FCC's three primary spectrum license databases:
Universal Licensing System (ULS), Consolidated DataBase System (CDBS), and
International Bureau Filing System. To determine the reliability of the
information from these databases, we interviewed officials at the
Wireless, Media, and International Bureaus within FCC about their data
collection and verification policies and procedures for license
information and electronically tested the ULS and CDBS databases. We
concluded that information from FCC's license databases was sufficiently
reliable to enable us to answer our objectives. We conducted our work from
March through August 2005 in accordance with generally accepted government
auditing standards.

In September and October 2005, we briefed the Senate Commerce Committee
staffs and provided copies of the briefing materials to the House Commerce
Committee staffs, respectively. As requested, this report summarizes and
transmits that briefing. The full briefing is included in enclosure I. We
plan to issue a final report on this work in December 2005.

2The Omnibus Budget Reconciliation Act of 1993 (Pub. L. No. 103-66, S:
6002, 107 Stat. 312, 387-392) added Section 309(j) to the Communications
Act, as amended. Section 309(j) authorizes FCC to use competitive bidding
to assign licenses for certain services.

3Pub. L. 108-494,118 Stat. 3986, tit. II (2004).

Summary

The current practice of allocating spectrum is largely regarded as being a
"command-and-control" process-that is, the government largely dictates the
use of spectrum. In particular, based on regulatory judgments, FCC
determines and limits what types of services-such as broadcast, satellite,
or mobile radio-will be offered in different frequency bands by geographic
area. In addition, FCC issues service rules to define the terms and
conditions for spectrum use within given bands. These rules typically
specify eligibility standards, as well as limitations on the services that
relevant entities may offer and the equipment and power levels they may
use. Stakeholders we spoke to and panelists on our expert panel identified
a number of weaknesses with the command-and-control process. For example,
panelists and stakeholders noted that it is slow, and sometimes leads to
underutilization of the spectrum. In the Spectrum Policy Task Force
Report, FCC staff identifies two alternative spectrum management models
that would allow it to move away from a command-and-control approach to
allocation: the "exclusive, flexible rights" model, and the "open-access,
or commons," model. The exclusive, flexible rights model provides
licensees with exclusive, flexible use, and transferable rights within
defined geographic areas. In contrast, the open-access model allows an
unlimited number of unlicensed users to share frequencies, with usage
rights governed by technical standards. Both models are more
market-oriented than the command-and-control model-that is, supply and
demand for spectrum-based services would play a greater role in
determining how spectrum is used, or allocated. FCC is currently using
elements of each model. For example, in recent years, FCC has provided
significant operational and technical flexibility for many commercial
radio services, such as personal communications service (PCS) and advanced
wireless services. However, there is limited consensus about fully
adopting either alternative model in the future. Recognizing that the two
alternative models are not necessarily mutually exclusive, many
stakeholders and panelists on our expert panel support mixed approaches to
spectrum management that would combine elements of both models.

Available evidence suggests that FCC's use of auctions has had little to
no negative impact on end-user prices, investment, and competition;
evidence on the impact on entry and participation of small businesses is
less clear. According to economic research and many of the industry
stakeholders we spoke with, auctions have little to no effect on end-user
prices because the auction payments represent a sunk cost,4 which do not
affect future-oriented decisions, such as pricing decisions. Similar
arguments were made for the impact of auctions on investment. In addition,
some industry stakeholders told us that companies' drive for a
return-on-investment (i.e., they need to earn a return on the auction
payment) and competition induces companies to invest and innovate. Thus,
rather than diverting resources from investment and innovation, auctions
encourage these actions. Many industry stakeholders also told us that
auctions generally do not place companies at a competitive or financial
disadvantage compared with companies that acquired licenses through means
other than auction. These stakeholders noted that many licenses initially
assigned through a process other than auction have been resold or that
companies that acquired licenses via means other than auction have
subsequently acquired additional licenses via auction; therefore, any
competitive advantage these companies gained by obtaining licenses through
other means have dissipated. The evidence is less certain regarding the
effect of auctions on entry and participation of small businesses. For
instance, many industry stakeholders we interviewed stated that auctions
limit participation to large companies with extensive financial resources.
However, others noted that large companies tended to also dominate the
comparative hearing process and that auctions at least make the process
transparent. In addition to auctions, companies can obtain licenses on the
secondary market, which is the sale or lease of licenses among private
entities. FCC has recently taken steps to facilitate secondary market
transactions, including streamlining the leasing approval process.

4Sunk costs are costs that have been incurred and cannot be reversed, for
example, paying for spectrum rights at an auction.

Industry stakeholders and panelists on our expert panel offered a number
of options for improving spectrum management. The most frequently cited
options include (1) reexamining the distribution of spectrum to enhance
the efficient and effective use of this important resource, (2) ensuring
clearly defined rights and flexibility in commercially licensed spectrum
bands, and (3) extending and modifying FCC's auction authority. For
example, a number of panelists suggested that the government evaluate the
relative allocation of spectrum for government and commercial use as well
as the allocation of spectrum for licensed and unlicensed purposes. There
was no consensus on these options for improvements among stakeholders and
panelists on our expert panel, except to extend FCC's auction authority.
Twenty-one of 22 panelists supported extending FCC's auction authority,
which is scheduled to expire in 2007.5

Agency Comments

We provided a draft of this report to FCC, NTIA, and the Office of
Management and Budget (OMB) for their review and comment. FCC provided
technical comments that we incorporated where appropriate. NTIA had no
comments on the draft and OMB provided no comments.

                                    - - - -

We are sending copies of this report to the appropriate congressional
committees. We are also sending this report to the Secretary of Commerce,
Chairman of the Federal Communications Commission, and the Director of the
Office of Management and Budget. We will also make copies available to
others upon request. In addition, the report will be available at no
charge on the GAO Web site at http://www.gao.gov.

5At the end of each expert panel session, we asked the panelists to
individually answer a short series of questions about the topics discussed
in order to more systematically capture individual panelist views on key
dimensions. Twenty-two of the 23 panelists responded to the questions we
posed at the end of each session.

Should you have any questions about this report, please contact me at
202-512-2834 or [email protected]. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. Individuals making key contributions to this report
include Amy Abramowitz, Stephen Brown, Emilie Cassou, Michael Clements,
Nikki Clowers, Kate Magdalena Gonzalez, Eric Hudson, Terri Russell, Mindi
Weisenbloom, and Alwynne Wilbur.

JayEtta Z. Hecker, Director, Physical Infrastructure Issues Enclosure

(544115)

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