Questions and Answers — Framework for Spectrum Auctions in Canada

Framework for Spectrum Auctions in Canada

1) Why does Industry Canada use auctions to assign spectrum?

Auctions offer a number of advantages such as their ability to promote economically efficient use of spectrum, their openness and objectivity as an assignment mechanism, their procedural efficiency, and their ability to return appropriate compensation to Canadian taxpayers for the use of a public resource.

Auctions represent a valuable new spectrum management tool for those situations where it will be appropriate to rely on market forces for the selection of licensees.

2) In future, will Industry Canada only assign spectrum through auctions?

No. The vast majority of licences will continue to be assigned on a first-come first-served basis as the instances of mutually exclusive demand for spectrum tend to be the exception, rather than the rule.

Auctions are just one of the available tools at the government's disposal to assign licences when the demand for spectrum exceeds the available supply. They may be used where the Minister of Industry is confident that market forces can be relied upon to select licensees consistent with the public interest. Where such reliance would not be appropriate, the traditional comparative review process remains available. They will not be used where the licensing involves priority users of the spectrum, e.g., national defence, public safety, or essential government operations.

3) Will spectrum for public safety services be auctioned?

No. The Department does not foresee the use of auctions in circumstances where priority users would contend with other applicants. The Department continues to be of the view, expressed in the 1992 Spectrum Policy Framework, that:

"Radiocommunication systems vital to sovereignty and national security, national defence, public security, safety and emergency will be granted high priority and support in the access and use of radio spectrum. Also, essential government operations, and other agencies providing critical services to the general public, will have high priority in use of the spectrum."

Priority spectrum users will remain just that, priority users.

4) Will Industry Canada auction spectrum for radio or television broadcasting?

No. Broadcasting licences are issued by the Canadian Radio-television and Telecommunications Commission (CRTC) under the Broadcasting Act. The Minister of Industry's role in broadcasting extends to spectrum management and the technical aspects of broadcasting, including determining frequency allotments and issuing technical certificates to broadcasting licensees selected by the CRTC.

5) Will spectrum for satellite systems be auctioned?

Given the current international regulatory regime, auctions are not an appropriate spectrum assignment methodology for satellite systems where such systems are global in nature or where a significant level of international co-ordination is required. However, if the Minister determined it to be appropriate, it would be quite feasible to use auctions to assign spectrum in certain types of 'planned' satellite bands such as planned Direct Broadcast Services (DBS) bands, where countries have predefined spectrum and orbital slots with recognized rights internationally.

6) How is spectrum auctioned?

The Department used a simultaneous multiple round auction design. In a simultaneous multiple round auction, multiple licences are open for bidding at the same time and bidding remains open on all licences as long as acceptable bids are placed on any of the licences. Bidding occurs in a sequence of rounds. The results of each round are announced to the bidders prior to the start of the next round. The auction is run by computer with on-line bidding.

7) What size were the spectrum blocks? What geographic areas did the licences cover?

The spectrum block size and geographic coverage of licences to be auctioned will be determined on a case-by-case basis for each auction and only after public consultation specific to that auction took place.

8) Does the introduction of spectrum auctions mean an end to the licensing of radiocommunications carriers on a nationwide basis?

No, it does not. Some services will naturally be better suited to national licensing while others will be well suited to licensing on a regional or localized basis. Prior to any spectrum auction, full public consultation will take place on the appropriate geographic basis for licensing. If national licences make sense, then national licences will be auctioned. In those situations where regional or local licences make sense, these will be offered. It is also important to note that the Departments's proposed simultaneous multiple round auction format will allow bidders to aggregate individual licences into the combinations that best fit their business plans.

9) What is the length of the licence term?

The Department intends to auction licences with a ten-year term and a high expectation of renewal at the end of the term. That is to say, the Department intends to generally renew auctioned licences for subsequent ten-year terms unless a breach of licence condition occurs, a fundamental reallocation of spectrum to a new service is required (e.g. a reallocation by the International Telecommunication Union), or an overriding policy need arises (e.g. a spectrum reallocation to address a national security issue). To provide a more stable investment climate for licensees, a consultation process would commence no later than two years prior to the end of the licence term (i.e. after year eight) if the Department foresaw the possibility that a licence would not be renewed. The imposition of any renewal fees and/or amendments to licence conditions for the initial licensees in the subsequent term would also be addressed in a consultation process which would commence no later than two years prior to the end of the licence term.

10) Can auction winners sell their licences to third parties?

Yes, provided that the third party meets all the same eligibility criteria (e.g. Canadian ownership and control) as the original licensee did. By allowing licences to be bought and sold after an auction, a firm with a more valuable new use of the spectrum can negotiate a transfer with the incumbent licensee that is beneficial not only to both parties, but also to consumers. Of course all conditions and obligations that were part of the original licence remain in force after any transfer.

11) How do successful bidders pay for their licences, in lump-sum payments or in instalment payments?

In its August 1997 consultation paper on auction implementation issues, the Department proposed that winning bidders would pay 25 percent of the amount of their bids at the auction's close with the remaining 75 percent to be paid in annual instalments over the term of the licence. It was felt that such an instalment payment scheme might aid smaller players who could have greater difficulty raising capital.

The majority of those who addressed this issue, however, strongly rejected the use of instalment payments. In reviewing foreign auction experiences, they noted that instalment payment schemes result in speculative bidding, inefficient assignment of licences, artificially inflated bid prices, bid payment defaults, and delayed roll-out of services to consumers.

The evidence and arguments presented by respondents show that instalment payment plans are largely detrimental to the auction process and do not serve to aid smaller players - indeed the artificial inflation of bid prices harms the legitimate small players which one might hope to aid through the use of instalment payments. As such, the Department will not allow the payment of bids in annual instalments but rather will require that winning bids be paid in full shortly after the close of an auction.

12) Is there a reserve bid?

Yes, there are reserve (minimum) bids. This is in accordance with the principle that all spectrum users should make a contribution toward the costs of spectrum management. These reserve prices will, however, be set at a modest level reflective only of spectrum management costs in order to ensure that no one who wishes to is deterred from providing services to consumers.

13) Are the licence fees of incumbents recalibrated to match auction results when similar spectrum is auctioned?

No. Incumbents' licence fees are not recalibrated on the basis of auction results for similar spectrum. The natural day to day variations of the market-place for all resources - be it minerals, timber or spectrum - show the difficulty in trying to assign a valuation derived in a past market transaction to today's or tomorrow's situation. As well, the Department recognizes that to do so could create significant uncertainty for licensees who acquired their licences in good faith with certain expectations regarding their licence fees.

14) How long does an auction take?

The Department estimates that for any given spectrum band, the elapsed time between the release of a pre-auction consultation paper and the opening of the actual bidding would be roughly six to nine months and that the auction itself would then take anywhere from several days to several weeks to complete with licences finally being issued, at most, two months after bidding had closed.

15) How much money does Industry Canada expect to generate from auctions?

The Department will not be making any estimates concerning potential revenue generated from auctions. The government's objective in conducting auctions is not to raise revenue, rather it is to award licencs fairly, efficiently and effectively so as to ensure that the Canadian public derives the maximum possible benefit from the spectrum resource.

16) Do auctions mean higher prices for consumers?

No. Prices for consumer services will be set according to demand and supply in the consumer services market-place. If one firm raises its prices, consumers will switch to a competitor. Firms will base their bids upon, among other things, the prices at which they will be able to sell their services to consumers. Auction bids thus depend on consumer prices; consumer prices do not depend on auction bids.

17) Does the use of auctions mean that only the biggest players with the deepest pockets will be able to acquire spectrum?

No. To promote strong competition in the wireless communications sector, spectrum aggregation limits or set-asides for new entrants can be used where necessary to ensure a diversity of players in the market-place.

18) Other administrations have encountered some problems with spectrum auctions. How does the Department address these problems in Canada?

Although most, if not all, administrations that have run spectrum auctions have considered them to be successes, a few problems have been encountered. These include problems with bid withdrawals and defaults, possible bid signalling, and submission of erroneous bids.

Based on the expert advice we have received from some of the world's leading auction experts and our continued analysis of auctioning around the world, we are very confident that we have effective solutions to these problems: bid withdrawal problems can be alleviated by implementing a withdrawal penalty, defaults can be avoided by requiring bids to be paid in lump sum amounts, and bid signalling and erroneous bid submission problems can be addressed with simple auction design modifications.

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