Telecommunications: Options for and Barriers to Spectrum Reform  
(14-MAR-06, GAO-06-526T).					 
                                                                 
The radio-frequency spectrum is used to provide an array of	 
wireless communications services that are critical to the U.S.	 
economy and various government missions, such as national	 
security. With demand for spectrum exploding, and most useable	 
spectrum allocated to existing users, there is growing concern	 
that the current spectrum management framework might not be able 
to respond adequately to future demands. This testimony, which is
based on previous GAO reports, provides information on (1) the	 
extent to which the Federal Communications Commission (FCC) has  
adopted market-based mechanisms for commercial use, (2) the	 
extent to which market-based mechanisms have been adopted for	 
federal government users of spectrum, (3) options for improving  
spectrum management, and (4) potential barriers to spectrum	 
reform. 							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-526T					        
    ACCNO:   A48939						        
  TITLE:     Telecommunications: Options for and Barriers to Spectrum 
Reform								 
     DATE:   03/14/2006 
  SUBJECT:   Competition					 
	     Radio frequency allocation 			 
	     Regulatory agencies				 
	     Spectrum management				 
	     Strategic planning 				 
	     Telecommunications 				 
	     Telecommunications industry			 
	     User fees						 
	     Wireless						 
	     Economic analysis					 
	     Supply and demand					 

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GAO-06-526T

     

     * Background
     * FCC Has Adopted Several Market-Based Mechanisms for Commerci
          * FCC Has Introduced Some Flexibility in the Spectrum Allocati
          * FCC's Use of Auctions for Commercial Licenses Is Seen as an
          * FCC Has Acted to Facilitate Secondary Market Transactions
     * Market-Based Mechanisms Have Not Been Adopted for Federal Go
          * Incentive-Based Fees Have Not Been Used to Promote Spectrum
          * Applying Market-Based Mechanisms to Federal Government Users
     * Industry Stakeholders and Panelists Suggested Several Option
          * Extend FCC's Auction Authority
          * Reexamine the Use and Distribution of Spectrum
          * Ensure Clearly Defined Rights and Flexibility
     * The Current Framework for Spectrum Management May Pose Barri
     * Concluding Observations
     * Contact and Acknowledgments
     * GAO's Mission
     * Obtaining Copies of GAO Reports and Testimony
          * Order by Mail or Phone
     * To Report Fraud, Waste, and Abuse in Federal Programs
     * Congressional Relations
     * Public Affairs

Testimony

Before the Committee on Commerce, Science, and Transportation United
States Senate

United States Government Accountability Office

GAO

For Release on Delivery Expected at 10:00 a.m. EST

Tuesday, March 14, 2006

TELECOMMUNICATIONS

Options for and Barriers to Spectrum Reform

Statement of JayEtta Z. Hecker, Director Physical Infrastructure Issues

GAO-06-526T

Mr. Chairman and Members of the Committee:

We appreciate the opportunity to provide testimony on spectrum reform
issues. As you know, the radio-frequency spectrum is used to provide an
array of wireless communications services that are critical to the U.S.
economy and various government missions, such as national security. Demand
for radio-frequency 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. 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. Compounding this concern is
evidence that some of the spectrum is currently underutilized. Many
parties believe that spectrum management reform-such as greater reliance
on market-based mechanisms that invoke the forces of demand and supply-is
essential to meeting the growing and unpredictable demand for spectrum.

My statement today will identify (1) the extent to which the Federal
Communications Commission (FCC) has adopted market-based mechanisms for
commercial uses of spectrum,1 (2) the extent to which market-based
mechanisms have been adopted for federal government use of spectrum, (3)
options for improving spectrum management, and (4) potential barriers to
spectrum reform. My comments are based on our body of work on spectrum
management, including our recently issued report to this Committee;2 these
reports were prepared in accordance with generally accepted government
auditing standards.

In summary:

1FCC manages spectrum use for nonfederal users, including commercial,
private, and state and local government users.

2GAO, Telecommunications: Strong Support for Extending FCC's Auction
Authority Exists, but Little Agreement on Other Options to Improve
Efficient Use of Spectrum, GAO-06-236 (Washington, D.C.: Dec. 20, 2005);
GAO, Telecommunications: Comprehensive Review of U.S. Spectrum Management
with Broad Stakeholder Involvement is Needed, GAO-03-277 (Washington,
D.C.: Jan. 31, 2003); and GAO, Telecommunications: Better Coordination and
Enhanced Accountability Needed to Improve Spectrum Management, GAO-02-906
(Washington, D.C.: Sept. 30, 2002).

           o  FCC is incrementally adopting market-based approaches to
           managing the commercial use of spectrum. Market-based mechanisms
           can help promote the efficient use of spectrum by invoking the
           forces of supply and demand-that is, they provide users an
           incentive to use the spectrum as efficiently as possible. Examples
           of market-based mechanisms include introducing flexibility in the
           use of spectrum, using auctions to assign licenses, and enhancing
           the use of secondary markets as a means for companies to obtain
           access to spectrum. FCC has adopted these mechanisms for
           commercial uses. For example, although FCC currently employs
           largely a command-and-control process for spectrum allocation, it
           has provided greater flexibility within certain spectrum bands. In
           addition, FCC began using auctions to assign spectrum licenses for
           commercial uses in 1994. According to industry stakeholders, FCC's
           implementation of auctions is seen as an improvement over
           comparative hearings and lotteries, the primary assignment
           mechanisms employed in the past. Finally, FCC has taken steps to
           facilitate greater secondary market activity, which may provide an
           additional mechanism to promote the efficient use of spectrum.

           o  While some countries have adopted market-based mechanisms to
           encourage the efficient use of spectrum by government agencies,
           the Department of Commerce's National Telecommunications and
           Information Administration (NTIA) has not adopted similar
           mechanisms for federal government use in the United States. NTIA
           imposes fees that recover only a portion of its cost to administer
           spectrum management, rather than incentive-based fees-that is,
           fees that more closely resemble market prices and thus encourage
           greater spectrum efficiency among government users; currently,
           NTIA does not have authority to impose fees that exceed its
           spectrum management costs. However, adopting market-based
           mechanisms for federal government use of spectrum might be
           difficult or undesirable in some contexts because of the primacy
           of certain government missions, the lack of flexibility in use of
           spectrum for some agencies, and the lack of financial incentives
           for government users.

           o  As we reported in December 2005, industry stakeholders and
           experts have identified a number of options for improving spectrum
           management. The most frequently cited options include (1)
           extending FCC's auction authority, (2) reexamining the use and
           distribution of spectrum, and (3) ensuring clearly defined rights
           and flexibility in commercially licensed spectrum bands; there was
           no consensus on these options, except for extending FCC's auction
           authority. Given the success of FCC's use of auctions and the
           overwhelming support for extending FCC's auction authority, we
           suggested that the Congress consider extending FCC's auction
           authority beyond the 2007 expiration date. Congress extended FCC's
           auction authority to 2011 with the passage of the Deficit
           Reduction Act of 2005.3

           o  The current management framework may pose barriers to reform
           since, while two agencies have been given responsibility for
           aspects of spectrum management, neither has been given ultimate
           decision-making authority over all spectrum use or the authority
           to impose fundamental reform, such as increasing the reliance on
           market-based mechanisms. Under this divided management framework,
           FCC manages spectrum for nonfederal users while NTIA manages
           spectrum for federal government users. However, spectrum
           management issues and major reform cross the jurisdictions of both
           agencies. To address these barriers, we have previously
           recommended that (1) the Secretary of Commerce and FCC establish
           and carry out formal, joint planning activities to develop a
           national spectrum plan to guide decision making; and (2) the
           relevant administrative agencies and congressional committees work
           together to develop and implement a plan for the establishment of
           a commission that would conduct a comprehensive examination of
           current spectrum management.4 To date, these recommendations have
           not been implemented.

           The radio-frequency spectrum is the part of the natural spectrum
           of electromagnetic radiation lying between the frequency limits of
           9 kilohertz and 300 gigahertz.5 It is the medium that makes
           wireless communications possible and supports a vast array of
           commercial and governmental services. Commercial entities use
           spectrum to provide a variety of wireless services, including
           mobile voice and data, paging, broadcast radio and television, and
           satellite services. Additionally, some companies use spectrum for
           private tasks, such as communicating with remote vehicles.
           Federal, state, and local agencies also use spectrum to fulfill a
           variety of government missions. For example, state and local
           police departments, fire departments, and other emergency services
           agencies use spectrum to transmit and receive critical voice and
           data communications, and federal agencies use spectrum for varied
           mission needs such as national defense, law enforcement, weather
           services, and aviation communication.

           Spectrum is managed at the international and national levels. The
           International Telecommunication Union (ITU), a specialized agency
           of the United Nations, coordinates spectrum management decisions
           among nations. Spectrum management decisions generally require
           international coordination, since radio waves can cross national
           borders. Once spectrum management decisions are made at the ITU,
           regulators within each nation, to varying degrees, will follow the
           ITU decisions. In the United States, responsibility for spectrum
           management is divided between two agencies: FCC and NTIA. FCC
           manages spectrum use for nonfederal users, including commercial,
           private, and state and local government users under authority
           provided in the Communications Act. NTIA manages spectrum for
           federal government users and acts for the President with respect
           to spectrum management issues.6 FCC and NTIA, with direction from
           the Congress, jointly determine the amount of spectrum allocated
           to federal and nonfederal users, including the amount allocated to
           shared use.

           Historically, concern about interference or crowding among users
           has been a driving force in the management of spectrum.7 FCC and
           NTIA work to minimize interference through two primary spectrum
           management functions-the "allocation" and the "assignment" of
           radio spectrum. Specifically:

           o  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. For example, the frequency
           bands between 88 and 108 megahertz (MHz) are allocated to FM radio
           broadcasting in the United States. In addition to allocation, FCC
           and NTIA also specify service rules, which include the technical
           and operating characteristics of equipment.

           o  Assignment, which occurs after spectrum has been allocated for
           particular types of services or classes of users, involves
           providing a license or authorization to use a specific portion of
           spectrum to users, such as commercial entities or government
           agencies. FCC assigns licenses for frequency bands to commercial
           enterprises, state and local governments, and other entities,
           while NTIA makes frequency assignments to federal agencies.

           When FCC assigns a portion of spectrum to a single entity, the
           license is considered exclusive. When two or more entities apply
           for the same exclusive license, FCC classifies these as mutually
           exclusive applications-that is, the grant of a license to one
           entity would preclude the grant to one or more other entities. For
           mutually exclusive applications, FCC has primarily used three
           assignment mechanisms-comparative hearings, lotteries, and
           auctions. FCC historically used comparative hearings, which gave
           competing applicants a quasi-judicial forum in which to argue why
           they should be awarded a license instead of other applicants. In
           1981, partially in response to the administrative burden of the
           comparative hearing process, the Congress authorized the use of
           lotteries, which allowed FCC to randomly select licenses from the
           qualified applicant pool. 8 The Congress provided FCC with
           authority to use auctions to assign mutually exclusive licenses
           for certain subscriber-based wireless services in the Omnibus
           Budget Reconciliation Act of 1993.9 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. As of
           November 30, 2005, FCC has conducted 59 auctions for over 56,000
           licenses to select between competing applications for the same
           license, which have generated over $14.5 billion for the U.S.
           Treasury. However, only a very small portion of total licenses has
           been auctioned. (See fig. 1.)

           Figure 1: Percent of Licenses Auctioned

           Notes:

           To calculate the percentage of licenses that have been auctioned,
           we divided the number of auctioned licenses by the number of
           licenses included in FCC's three spectrum license databases.

           Licenses can vary considerably in terms of bandwidth, as well as
           the geographic area and population covered.

           In some frequency bands, FCC authorizes unlicensed use of
           spectrum-that is, users do not need to obtain a license to use the
           spectrum.10 Rather, an unlimited number of unlicensed users can
           share frequencies on a non-interference basis. Thus, the
           assignment process does not apply to the use of unlicensed
           devices. However, manufacturers of unlicensed equipment must
           receive authorization from FCC before operating or marketing an
           unlicensed device.

           To promote the more efficient use of spectrum, FCC is
           incrementally adopting market-based approaches to spectrum
           management. For instance, FCC has introduced some flexibility in
           the spectrum allocation process, although it remains largely a
           command-and-control process. In addition, in 1994, FCC instituted
           auctions to assign certain spectrum licenses. According to
           industry stakeholders, FCC's use of auctions is seen as an
           improvement over comparative hearings and lotteries, the primary
           assignment mechanisms employed in the past. Finally, FCC has taken
           steps to facilitate greater secondary market activity, which may
           provide an additional mechanism to promote the more efficient use
           of spectrum.

           FCC currently employs largely a command-and-control process for
           spectrum allocation.11 That is, FCC applies regulatory judgments
           to determine and limit what types of services-such as broadcast,
           satellite, or mobile radio-will be offered in different frequency
           bands by geographic area. In addition, for most frequency bands
           FCC allocates, the agency issues service rules to define the terms
           and conditions for spectrum use within the given bands. These
           rules typically specify eligibility standards as well as
           limitations on the services that relevant entities may offer and
           the technologies and power levels they may use. These decisions
           can constrain users' ability to offer services and equipment of
           their choosing.

           However, FCC has provided greater operational and technical
           flexibility within certain frequency bands. For example, FCC's
           rules for Commercial Mobile Radio Service (CMRS), which include
           cellular and Personal Communications Services (PCS), are
           considered less restrictive. Under these rules, wireless telephony
           operators are free to select technologies, services, and business
           models of their choosing. FCC has not provided comparable
           flexibility in other bands.12 For example, spectrum users have
           relatively little latitude for making similar choices in frequency
           bands allocated to broadcast television services.

           Further, the Spectrum Policy Task Force Report, a document
           produced by FCC staff, identified two alternatives to the
           command-and-control model: the "exclusive, flexible rights" model,
           and the "open-access" model.13 The exclusive, flexible rights
           model provides licensees with exclusive, flexible use of the
           spectrum and transferable rights within defined geographic areas.
           This is a licensed-based approach to spectrum management that
           extends the existing allocation process by providing greater
           flexibility regarding the use of spectrum, and the ability to
           transfer licenses or to lease spectrum usage rights. The
           open-access model allows a potentially unlimited number of
           unlicensed users to share frequency bands, with usage rights
           governed by technical standards, but with no rights to
           interference protection. This approach does not require licenses,
           and as such is similar to FCC's Part 15 rules (which govern
           unlicensed use in the 900 MHz, 2.4 GHz, and 5.8 GHz bands)-where
           cordless phones and Wi-Fi technologies operate. Both models allow
           flexible use of spectrum, so that users of spectrum, rather than
           FCC, play a larger role in determining how spectrum is ultimately
           used. FCC's Spectrum Policy Task Force recommended a balanced
           approach to allocation-utilizing aspects of the
           command-and-control; exclusive, flexible rights; and open-access
           models. FCC is currently using elements of these two alternatives
           models, although it primarily employs the command-and-control
           model.

           In 1994, FCC began using auctions-a market-based mechanism that
           assigns a license to the entity that submits the highest bid for
           specific bands of spectrum. FCC's implementation of auctions
           mitigates a number of problems associated with comparative
           hearings and lotteries-the two primary assignment mechanism
           employed until 1993. For example:

           o  Auctions are a relatively quick assignment mechanism. With
           auctions, FCC reduced the average time for granting a license to
           less than 1 year from the initial application date, compared to an
           average time of over 18 months with comparative hearings.

           o  Auctions are administratively less costly than comparative
           hearings. Entities seeking a license can reduce expenditures for
           engineers and lawyers arising from preparing applications,
           litigating, and lobbying; and FCC can reduce expenditures
           associated with reviewing and analyzing applications.

           o  Auctions are a transparent process. FCC awards licenses to
           entities submitting the highest bid rather than relying on
           possibly vague criteria, as was done in comparative hearings.

           o  Auctions are effective in assigning licenses to entities that
           value them the most. Alternatively, with lotteries, FCC awarded
           licenses to randomly-selected entities.

           o  Auctions are an effective mechanism for the public to realize a
           portion of the value of a national resource used for commercial
           purposes. Entities submitting winning bids must remit the amount
           of their winning bid to the government, which represents a portion
           of the value that the bidder believes will arise from using the
           spectrum.

           As we reported in December 2005, many industry stakeholders we
           contacted, and panelists on our expert panel, stated that auctions
           are more efficient than previous mechanisms used to assign
           spectrum licenses.14 For example, among our panelists, 11 of 17
           reported that auctions provide the most efficient method of
           assigning licenses; no panelist reported that comparative hearings
           or lotteries provided the most efficient method. Of the remaining
           panelists, several suggested that the most efficient mechanism
           depended on the service that would be permitted with the
           spectrum.15

           While FCC's initial assignment mechanisms provide one means for
           companies to acquire licenses, companies can also acquire licenses
           or access to spectrum through secondary market transactions.
           Through secondary markets, companies can engage in transactions
           whereby a license or use of spectrum is transferred from one
           company to another. These transactions can incorporate the sale or
           trading of licenses. In some instances, companies acquire licenses
           through the purchase of an entire company, such as Cingular's
           purchase of AT&T Wireless. Ultimately, FCC must approve
           transactions that result in the transfer of licenses from one
           company to another.

           Secondary markets can provide several benefits. First, secondary
           markets can promote more efficient use of spectrum. If existing
           licensees are not fully utilizing the spectrum, secondary markets
           provide a mechanism whereby these licensees can transfer use of
           the spectrum to other companies that would utilize the spectrum.
           Second, secondary markets can facilitate the participation of
           small businesses and introduction of new technologies. For
           example, a company might have a greater incentive to deploy new
           technologies that require less spectrum if the company can
           profitably transfer the unused portion of the spectrum to another
           company through the secondary market. Also, several stakeholders
           with whom we spoke noted that secondary markets provide a
           mechanism whereby a small business can acquire spectrum for a
           geographic area that best meets the needs of the company.

           In recent years, FCC has undertaken actions to facilitate
           secondary-market transactions. FCC authorized spectrum leasing for
           most wireless radio licenses with exclusive rights and created two
           categories of spectrum leases: Spectrum Manager Leasing-where the
           licensee retains legal and working control of the spectrum-and de
           Facto Transfer Leasing-where the licensee retains legal control
           but the lessee assumes working control of the spectrum. FCC also
           streamlined the procedures that pertain to spectrum leasing. For
           instance, the Spectrum Manager Leases do not require prior FCC
           approval and de Facto Transfer Leases can receive immediate
           approval if the arrangement does not raise potential public
           interest concerns.16 While FCC has taken steps to facilitate
           secondary market transactions, some hindrances remain. For
           example, some industry stakeholders told us that the lack of
           flexibility in the use of spectrum can hinder secondary market
           transactions.

           In some countries, spectrum managers have adopted market-based
           mechanisms to encourage the efficient use of spectrum by
           government agencies. In the United States, NTIA has not adopted
           incentive-based fees for federal government users of spectrum;
           rather, NTIA applies fees that recover only a portion of the cost
           of administering spectrum management. Additionally, adopting
           market-based mechanisms for government use of spectrum might be
           difficult or undesirable in some contexts because of the primacy
           of certain government missions, the lack of flexibility in use of
           spectrum for some agencies, and the lack of financial incentives
           for government users.

           Spectrum managers in some countries have adopted market-based
           mechanisms for government users of spectrum. For example, in
           Australia, Canada, and the United Kingdom, spectrum managers have
           implemented incentive-based fees for government users of spectrum.
           Incentive-based fees are designed to promote the efficient use of
           spectrum by compelling spectrum users to recognize the value to
           society of the spectrum that they use. In other words, these fees
           mimic the functions of a market. These incentive-based fees differ
           from other regulatory fees that are assessed only to recover the
           cost of the government's management of spectrum.

           In the United States, NTIA has not adopted incentive-based fees,
           or other market-based mechanisms, for federal government users of
           spectrum. Currently, NTIA charges federal agencies spectrum
           management fees, which are based on the number of assignments
           authorized to each agency. In our 2002 report, we noted that,
           according to NTIA, basing the fee on the number of assignments,
           rather than the amount of spectrum used per agency, better
           reflects the amount of work NTIA must do for each agency.17
           Moreover, NTIA stated that this fee structure provides a wider
           distribution of costs to agencies. However, NTIA's fee does not
           reflect the value of the spectrum authorized to each agency, and
           thus it is not clear how much this encourages the efficient use of
           spectrum by federal agencies. The fee also recovers only a portion
           of the cost of administering spectrum management. NTIA does not
           currently have the authority to impose fees on government users
           that exceed its spectrum management costs.18

           Applying market-based mechanisms might be difficult or undesirable
           for federal government users in some situations. The purpose of
           market-based mechanisms is to provide users with an incentive to
           use spectrum as efficiently as possible. However, the
           characteristics of government use of spectrum impose challenges to
           the development and implementation of market-based mechanisms for
           federal government users, and in some situations, make
           implementation undesirable. For example:

           o  Primacy of certain federal government missions. Because of the
           primacy of certain federal government missions-such as national
           defense, homeland security, and public safety-imposition of
           market-based mechanisms for use of the spectrum to fulfill these
           missions might not be desirable. In fact, NTIA officials have told
           us that the agency rarely revokes the spectrum authorization of
           another government agency because doing so could interfere with
           the agency's ability to carry out important missions.

           o  Lack of flexibility in use of spectrum. Market-based mechanisms
           can create an incentive to use spectrum more efficiently only if
           users can actually choose to undertake an alternative means of
           providing a service. In some situations, federal government
           agencies do not have a viable alternative to their current
           spectrum authorization. For example, spectrum used for air traffic
           control has been allocated internationally for the benefit of
           international air travel. Thus, the Federal Aviation
           Administration has little ability to use spectrum differently than
           prescribed in its current authorizations. In situations such as
           this, market-based mechanisms would likely prove ineffective.

           o  Lack of financial incentives. If federal government users can
           obtain any needed funding for spectrum-related fees through the
           budgetary process, market-based mechanisms are not likely to be
           effective. However, imposing fees will make the cost visible to
           agency managers, thus providing them information they need if they
           are to manage spectrum use more efficiently. Whether more
           efficient spectrum use actually occurs will depend in part on
           whether agencies receive appropriations for the full amount of the
           fees or only for some portion. If agencies do not receive
           appropriations for the full amount, some pressure will be created,
           but it will not be as strong as the private sector's profit
           motive.

           As we reported in December 2005, industry stakeholders and
           panelists on our expert panel offered a number of options for
           improving spectrum management.19 The most frequently cited options
           include (1) extending FCC's auction authority, (2) reexamining the
           distribution of spectrum-such as between commercial and government
           use-to enhance the efficient and effective use of this important
           resource, and (3) ensuring clearly defined rights and flexibility
           in commercially licensed spectrum bands. There was no consensus on
           these options for improvements among stakeholders we interviewed
           and panelists on our expert panel, except for extending FCC's
           auction authority.

           Panelists on our expert panel and industry stakeholders with whom
           we spoke overwhelmingly supported extending FCC's auction
           authority. For example, 21 of 22 panelists on our expert panel
           indicated that the Congress should extend FCC's auction authority
           beyond September 2007-the date auction authority was set to expire
           at the time of our expert panel. Given the success of FCC's use of
           auctions and the overwhelming support among industry stakeholders
           and experts for extending FCC's auction authority, we suggested
           that the Congress consider extending FCC's auction authority. In
           February 2006, the Congress extended FCC's auction authority to
           2011 with the passage of the Deficit Reduction Act of 2005.20

           While panelists on our expert panel overwhelmingly supported
           extending FCC's auction authority, a majority also suggested
           modifications to enhance the use of auctions.21 However, there was
           little consensus on the suggested modifications. The suggested
           modifications fall into the following three categories:

           o  Better define license rights. Some industry stakeholders and
           panelists indicated that FCC should better define the rights
           accompanying spectrum licenses, as these rights can significantly
           affect the value of a license being auctioned. For example, some
           industry stakeholders expressed concern with FCC assigning overlay
           and underlay rights to frequency bands when a company holds a
           license for the same frequency bands.22

           o  Enhance secondary markets. Industry stakeholders we contacted
           and panelists on our expert panel generally believed that
           modifying the rules governing secondary markets could lead to more
           efficient use of spectrum. For example, some panelists on our
           expert panel said that FCC should increase its involvement in the
           secondary market. These panelists thought that increased oversight
           could help to both ensure transparency in the secondary market and
           also promote the use of the secondary market. Additionally, a few
           panelists said that adoption of a "two-sided" auction would
           support the efficient use of spectrum. With a two-sided auction,
           FCC would offer unassigned spectrum, and existing licensees could
           make available the spectrum usage rights they currently hold.

           o  Reexamine existing small business incentives. The opinions of
           panelists on our expert panel and industry stakeholders with whom
           we spoke varied greatly regarding the need for and success of
           FCC's efforts to promote economic opportunities for small
           businesses. For example, some panelists and industry stakeholders
           do not support incentive programs for small businesses. These
           panelists and industry stakeholders cited several reasons for not
           supporting these incentives, including (1) the wireless industry
           is not a small business industry; (2) while the policy may have
           been well intended, the current program is flawed; or (3) such
           incentives create inefficiencies in the market. Other industry
           stakeholders suggested alternative programs to support small
           businesses. These suggestions included (1) having licenses cover
           smaller geographic areas, (2) using auctions set aside exclusively
           for small and rural businesses, and (3) providing better lease
           options for small and rural businesses. Finally, some industry
           stakeholders with whom we spoke have benefited from the small
           business incentive programs, such as bidding credits,23 and
           believe that these incentives have been an effective means to
           promote small business participation in wireless markets.

           Panelists on our expert panel suggested a reexamination of the use
           and distribution of spectrum to ensure the most efficient and
           effective use of this important resource. One panelist noted that
           the government should have a good understanding of how much of the
           spectrum is being used. To gain a better understanding, a few
           panelists suggested that the government systematically track
           usage, perhaps through a "spectrum census." This information would
           allow the government to determine if some portions of spectrum
           were underutilized, and if so, to make appropriate allocation
           changes and adjustments.24

           A number of panelists on our expert panel also 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. While panelists
           thought the relative allocation between these categories should be
           examined, there was little consensus among the panelists on the
           appropriate allocation. For instance, as shown in figure 2, 13
           panelists indicated that more spectrum should be dedicated to
           commercial use, while 7 thought the current distribution was
           appropriate; no panelists thought that more spectrum should be
           dedicated to government use. Similarly, as shown in figure 3, nine
           panelists believed that more spectrum should be dedicated to
           licensed uses, six believed more should be dedicated to unlicensed
           uses, and five thought the current balance was appropriate.

           Figure 2: Panelists' Views on the Allocation of Spectrum between
           Commercial and Government Use

           Figure 3: Panelists' Views on the Allocation of Spectrum between
           Licensed and Unlicensed Use

           Similar to a suggested modification of FCC's auction authority,
           some panelists on our expert panel suggested better defining
           users' rights and increasing flexibility in the allocation of
           spectrum. Better defining users' rights would clarify the
           understanding of the rights awarded with any type of license,
           whether the licensees acquired the license through an auction or
           other means. In addition, some panelists stated that greater
           flexibility in the type of technology used-and service
           offered-within frequency bands would help promote the efficient
           use of spectrum. In particular, greater flexibility would allow
           the licensee to determine the efficient and highly valued use,
           rather than relying on FCC-based allocation and service rules.
           However, some panelists on our expert panel and industry
           stakeholders with whom we spoke noted that greater flexibility can
           lead to interference, as different licensees provide potentially
           incompatible services in close proximity.25 Thus, panelists on our
           expert panel stressed the importance of balancing flexibility with
           interference protection.

           Under the current management framework, neither FCC nor NTIA has
           been given ultimate decision-making authority over all spectrum
           use or the authority to impose fundamental reform, such as
           increasing the reliance on market-based mechanisms. FCC manages
           spectrum for nonfederal users while NTIA manages spectrum for
           federal government users.26 As such, FCC and NTIA have different
           perspectives on spectrum use. FCC tends to focus on maximizing
           public access to and use of the spectrum. Alternatively, NTIA
           tends to focus on protecting the federal government's use of the
           spectrum from harmful interference, especially in areas critical
           to national security and public safety. Further, despite increased
           communication between FCC and NTIA, the agencies' different
           jurisdictional responsibilities appear to result in piecemeal
           efforts that lack the coordination to facilitate major spectrum
           reform. For example, FCC's and NTIA's recent policy evaluations
           and initiatives-the FCC Spectrum Policy Task Force and the Federal
           Government Spectrum Task Force, respectively-tend to focus on the
           issues applicable to the users under their respective
           jurisdictions.27

           Major spectrum reform must ultimately address multidimensional
           stakeholder conflicts. One source of conflict relates to balancing
           the needs of government and private-sector spectrum users.
           Government users have said that because they offer unique and
           critical services, a dollar value cannot be placed on the
           government's provision of spectrum-based services. At the same
           time, private-sector users have stated that their access to
           spectrum is also critical to the welfare of society, through its
           contribution to a healthy and robust economy. A second source of
           conflict relates to balancing the needs of incumbent and new users
           of spectrum. Since most useable spectrum has been allocated and
           assigned, accommodating new users of spectrum can involve the
           relocation of incumbent users. While new users of spectrum view
           relocations as essential, incumbent users often oppose relocations
           because the moves may impose significant costs and disrupt their
           operations. A third source of conflict relates to existing
           technology and emerging technology. Some new technologies, such as
           ultra wideband,28 may use the spectrum more efficiently, thereby
           facilitating more intensive use of the spectrum. However, users of
           existing technology, both commercial and government, have
           expressed concern that these new technologies may create
           interference that compromises the quality of their services.

           The current spectrum management framework may pose a barrier to
           spectrum reform because neither FCC nor NTIA has ultimate
           authority to impose fundamental reform and these stakeholder
           conflicts cross the jurisdictions of both FCC and NTIA. As such,
           contentious and protracted negotiations arise over spectrum
           management issues. We previously made two recommendations to help
           further the reform process. First, we recommended that the
           Secretary of Commerce and FCC should establish and carry out
           formal, joint planning activities to develop a national spectrum
           plan to guide decision making.29 Additionally, we also recommended
           that the relevant administrative agencies and congressional
           committees work together to develop and implement a plan for the
           establishment of an independent commission that would conduct a
           comprehensive examination of current spectrum management.30 To
           date, neither recommendation has been implemented.

           With authorization from Congress, FCC has taken several steps to
           implement a more market-oriented approach to spectrum management.
           In recent years, FCC has taken actions to facilitate
           secondary-market transactions. FCC authorized spectrum leasing for
           most wireless radio licenses with exclusive rights and also
           streamlined the procedures that pertain to spectrum leasing. In
           addition, FCC has conducted 59 auctions for a wide variety of
           spectrum uses, including personal communications services and
           broadcasting. FCC's auctions have contributed to a vibrant
           commercial wireless industry. The Congress' recent decision to
           extend FCC's auction authority was, in our opinion, a positive
           step forward in spectrum reform. However, more work is needed to
           ensure the efficient and effective use of this important national
           resource. To help reform spectrum management, we have previously
           recommended that (1) the Secretary of Commerce and FCC should
           establish and carry out formal, joint planning activities to
           develop a national spectrum plan to guide decision making; and (2)
           the relevant administrative agencies and congressional committees
           work together to develop and implement a plan for the
           establishment of a commission that would conduct a comprehensive
           examination of current spectrum management.31 To date, these
           recommendations have not been implemented.

           Mr. Chairman, this concludes my prepared statement. I would be
           happy to respond to any questions you or other Members of the
           Committee may have at this time.

           For questions regarding this testimony, please contact JayEtta Z.
           Hecker on (202) 512-2834 or [email protected]. Individuals making
           key contributions to this testimony include Amy Abramowitz,
           Michael Clements, Nikki Clowers, Eric Hudson, and Mindi
           Weisenbloom.

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                                   Background

3Pub. L. No. 109-171, S:3003, 120 Stat. 4 (2006).

4 GAO-02-906 and GAO-03-277 .

5Radio signals travel through space in the form of waves. These waves vary
in length, and each wavelength is associated with a particular radio
frequency. Radio frequencies are grouped into bands and are measured in
units of Hertz. The term kilohertz refers to thousands of Hertz, megahertz
(MHz) to millions of Hertz, and gigahertz to billions of Hertz.

6The Department of State also plays a role in spectrum management by
coordinating and mediating the U.S. position and leading the nation's
delegation to international conferences on spectrum management.

7Interference occurs when two or more radio signals interact in a manner
that disrupts the transmission and reception of messages.

8In 1981, Congress added Section 309(i) to the Communications Act to give
FCC the authority to assign a broad range of licenses by lottery. The
Balanced Budget Act of 1997, Pub. L. No. 105-33, 111 Stat. 260, tit. III,
S: 3002, terminated FCC's authority to assign licenses by lotteries,
except with respect to licenses for non-commercial broadcast stations and
public broadcast stations. See, 47 U.S.C. S: 309(i)(5) and 47 U.S.C. S:
397(6).

947 U.S.C. S: 309(j). In subsequent years, the Congress has modified and
extended FCC's auction authority, including exempting some licenses from
competitive bidding, such as licenses for public safety radio services and
noncommercial educational broadcast services.

10Traditional unlicensed devices are low-powered equipment that operate in
a limited geographic range, such as cordless phones, baby monitors, garage
door openers, and wireless access to the Internet.

      FCC Has Adopted Several Market-Based Mechanisms for Commercial Uses

FCC Has Introduced Some Flexibility in the Spectrum Allocation Process but
Allocation Remains Largely a Command-and-Control Process

11NTIA employs a similar process for federal government spectrum users.

12In some instances, statutory restrictions are an impediment to granting
greater flexibility.

13For more information on these alternative spectrum management models,
including the perceived advantages and disadvantages of each, see
GAO-06-236 .

FCC's Use of Auctions for Commercial Licenses Is Seen as an Improvement Over
Past Assignment Mechanisms

FCC Has Acted to Facilitate Secondary Market Transactions

14See GAO-06-236 . We convened, in collaboration with the National
Academies, two panels of experts to discuss spectrum allocation and
assignment issues and options to improve spectrum management. The
panelists convened at the National Academies on August 9, 2005, and
August, 10, 2005. A total of 23 panelists participated on our two expert
panels. For more information on the expert panels, see GAO-06-236 .

15For example, some panelists did not support using auctions to assign
spectrum licenses for public safety services.

16The public interest concerns arise as a result of FCC policies
pertaining to (1) eligibility and use of the license and spectrum, (2)
foreign ownership limitations, (3) designated entity and entrepreneur
benefits, and (4) competition. See Promoting Efficient Use of Spectrum
Through Elimination of Barriers to the Development of Secondary Markets,
WT Docket No. 00-230, Second Report and Order, Order on Reconsideration,
and Second Further Notice of Proposed Rulemaking, 19 FCC Rcd. 17503
(2004).

  Market-Based Mechanisms Have Not Been Adopted for Federal Government Use of
                                    Spectrum

Incentive-Based Fees Have Not Been Used to Promote Spectrum Efficiency Among
Federal Government Users of Spectrum in the United States

17 GAO-02-906 .

Applying Market-Based Mechanisms to Federal Government Users May Not Be
Effective in All Contexts

18In its 2005 program assessment of NTIA, OMB noted that NTIA does not
currently have sufficient mechanisms in place to ensure efficient and
effective federal spectrum use. OMB further notes that NTIA lacks the
authority to implement market-based or other incentives to promote
efficient and effective use of the federal spectrum among federal
agencies. According to OMB, NTIA plans to study incentives to promote the
more efficient and effective use of spectrum and seek authority to
implement incentives, as appropriate.

    Industry Stakeholders and Panelists Suggested Several Options to Improve
                              Spectrum Management

Extend FCC's Auction Authority

19 GAO-06-236 .

20Pub. L. No. 109-171.

21Fifteen of twenty-two panelists suggested modifications to enhance the
use of auctions.

22Underlay rights allow unlicensed users to operate in the same spectrum
bands as licensees, as long as the unlicensed users do not cause undue
interference for licensees. For example, ultra-wideband technology
operates at very low power levels over a very wide range of spectrum, and
thus might avoid interfering with licensed spectrum users in the same
spectrum bands. Overlay rights allow unlicensed users to operate in
licensed spectrum bands during times or in geographic areas where
licensees are not using the spectrum.

Reexamine the Use and Distribution of Spectrum

23A bidding credit is a percentage discount applied to the high bid amount
if the bidder meets designated entity criteria established in the auction
rules. In February 2006, FCC issued a notice of proposed rule making to
consider whether its general competitive bidding rules should be modified.

24In February 2006, the Technology CEO Council released a report entitled,
Freeing Our Unused Spectrum: Toward a 21st Century Telecom Policy
(Washington, D.C.: Feb. 2006). This report included recommendations for
FCC and NTIA to examine how efficiently spectrum bands are being used and
encourage more efficient use of bands that are not found to be used
efficiently.

Ensure Clearly Defined Rights and Flexibility

The Current Framework for Spectrum Management May Pose Barriers to Reform

25With the current allocation process, FCC attempts to keep incompatible
service separated to avoid interference. With licensees exerting greater
control, this protection could be reduced.

26In some countries, a single government entity regulates spectrum for all
users. For example, Industry Canada has exclusive spectrum management
responsibility in Canada.

27At a recent NTIA-sponsored workshop addressing spectrum management, the
topics discussed included issues relevant for both FCC and NTIA, and the
participants included spectrum managers from several government agencies,
as well as FCC officials, commercial users, and other experts.

28Ultra wideband devices emit a low-power signal over large swaths of
spectrum.

29 GAO-02-906 .

                            Concluding Observations

30 GAO-03-277 .

31 GAO-02-906 and GAO-03-277 .

                          Contact and Acknowledgments

(544120)

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Highlights of GAO-06-526T , testimony before the Committee on Commerce,
Science, and Transportation, United States Senate

March 14, 2006

TELECOMMUNICATIONS

Options for and Barriers to Spectrum Reform

The radio-frequency spectrum is used to provide an array of wireless
communications services that are critical to the U.S. economy and various
government missions, such as national security. With demand for spectrum
exploding, and most useable spectrum allocated to existing users, there is
growing concern that the current spectrum management framework might not
be able to respond adequately to future demands. This testimony, which is
based on previous GAO reports, provides information on (1) the extent to
which the Federal Communications Commission (FCC) has adopted market-based
mechanisms for commercial use, (2) the extent to which market-based
mechanisms have been adopted for federal government users of spectrum, (3)
options for improving spectrum management, and (4) potential barriers to
spectrum reform.

What GAO Recommends

In previous reports, GAO recommended that (1) the Secretary of Commerce
and FCC should jointly develop a national spectrum plan to guide decision
making, and (2) the relevant administrative agencies and congressional
committees work together to develop and implement a plan for the
establishment of an independent commission that would conduct a
comprehensive examination of current spectrum management. To date, these
recommendations have not been implemented.

FCCis incrementally adopting market-based approaches for managing the
commercial use of spectrum. Market-based mechanisms can help promote the
efficient use of spectrum by invoking the forces of supply and demand. For
example, although FCC currently employs largely a command-and-control
process for spectrum allocation, it has provided greater flexibility
within certain spectrum bands. In addition, FCC began using auctions to
assign spectrum licenses for commercial uses in 1994. Finally, FCC has
taken steps to facilitate greater secondary market activity, which may
provide an additional mechanism to promote the efficient use of spectrum.

While some countries have adopted market-based mechanisms to encourage the
efficient use of spectrum by government agencies, the Department of
Commerce's National Telecommunications and Information Administration
(NTIA) has not adopted similar mechanisms for federal government use in
the United States. NTIA imposes fees designed to recover only a portion of
its cost to administer spectrum management, rather than fees that would
more closely resemble market prices and thus encourage greater spectrum
efficiency among government users; currently, NTIA does not have authority
to impose fees that exceed its spectrum management costs. However,
adopting market-based mechanisms for federal government use of spectrum
might be difficult or undesirable in some contexts because of the primacy
of certain government missions, the lack of flexibility in use of spectrum
for some agencies, and the lack of financial incentives for government
users.

Industry stakeholders and experts have identified a number of options for
improving spectrum management. The most frequently cited options include
(1) extending FCC's auction authority, (2) reexamining the use and
distribution of spectrum, and (3) ensuring clearly defined rights and
flexibility in commercial spectrum bands; there was no consensus on these
options, except for extending FCC's auction authority. Given the success
of FCC's use of auctions and the overwhelming support for extending FCC's
auction authority, GAO suggested that the Congress consider extending
FCC's auction authority beyond 2007. Congress extended FCC's auction
authority to 2011 with the passage of the Deficit Reduction Act of 2005.

The current spectrum management framework may pose barriers to reform,
since neither FCC nor NTIA has been given ultimate decision-making
authority over all spectrum use, or the authority to impose fundamental
reform, such as increasing the reliance on market-based mechanisms. Under
the divided management framework, FCC manages spectrum for nonfederal
users, including commercial uses, while NTIA manages spectrum for federal
government users. As such, FCC and NTIA have different perspectives on
spectrum use. Further, spectrum management issues and major reform cross
the jurisdictions of both agencies. Thus, contentious and protracted
negotiations arise over spectrum management issues.
*** End of document. ***