Policy and Licensing Procedures for the Auction of Spectrum Licences in the 2300 MHz and 3500 MHz Bands
8. Auction Design and Rules
In the consultation paper, the Department proposed a simultaneous multiple round auction similar to the auctions of the 24 and 38 GHz Bands and the auction of additional PCS spectrum in the 2 GHz frequency range. Many respondents acknowledged that these auctions operated efficiently and would be adequate for assigning the 2300 MHz and 3500 MHz spectrum licences.
With the exception of a few minor improvements, the Department will use its single-increment, non-discretionary bidding software system as was used in previous auctions.
8.2 Key Features
The auction will be run electronically over the Internet, and bidders will be able to participate remotely from their premises using a secure Internet connection. The key features of the simultaneous multiple round auction that will be used are listed below.
- The rules for the simultaneous multiple round auction call for a related set of licences to be offered at the same time. Bidding is organized into a series of rounds. The identities of all bidders, the licences on which they are qualified to bid, and their initial levels of eligibility points will be made public prior to the commencement of bidding. As well, full information on the bids placed by all bidders will be made available after each round.
- New bids for a licence are non-discretionary. The Department will state the exact level of an acceptable new bid. The new bid will typically be determined by raising the standing high bid by a pre-established bid increment. Bidders will have no discretion to choose a higher bid; rather they will simply choose whether or not to submit the new bid. This non-discretionary format allows rounds to be more brief and more frequent, because the mechanics of entering and checking bids are simpler, and because the prices never "jump" by unexpected amounts, making them more predictable. This also reduces the need for frequent executive oversight during the bidding, saving costs for the bidders.
- When two or more bids are submitted on the same licence in the same round a tie bid occurs and the standing high bidder in the next round will be determined by a random selection process designed within the auction software.
- In each round bidders are offered an opportunity to withdraw bids made in previous rounds, subject to the penalties specified in Section 8.10.
- A minimum pace of bidding in the auction is established by the "activity rule" which penalizes bidders who are inactive by reducing their "bidder eligibility points".
- The rounds continue until there is a round in the third stage in which no new bids, withdrawals, or pro-active waivers are submitted. The standing high bidders on each licence at the auction's close will be deemed the provisional winners of those licences.
All the details of the auction format are discussed more fully below.
8.3 Bidder Eligibility Points
Each of the 848 licences have been assigned a specific number of eligibility points ("points") that are approximately proportionate to the population covered by the licence. One eligibility point is approximately equal to 20,000 in population per 25 MHz of spectrum. Refer to Appendix 7 for a listing of the points for each licence and the population of each service area. In their application each applicant must indicate, the total number of "points worth" of licences on which they wish to bid in any round. This number defines the initial level of bidder eligibility points of an applicant and is also used to determine the financial deposit that must be submitted with the application. Bidder eligibility points may not be increased.
The Department will assign the same eligibility points for a 30 MHz licence in the 2300 MHz band as it will for the single 25 MHz block (e.g. block G) in the 3500 MHz band. In some cases, the number of points associated with a licence has been adjusted in order to provide bidders with maximum flexibility in transferring their eligibility points among the available licences.
The financial deposit is $500 per eligibility point for the first two hundred (200) points and $3,000 per eligibility point requested thereafter. Refer to Section 7.3.1 for further information on financial deposits. Regardless of the financial deposit submitted by any bidder, no bidder will be given more eligibility points than it can possibly use without violating the spectrum aggregation limits.
In the event that an applicant's requested level of points does not correspond with the amount of the deposit submitted, then that applicant's points will be determined by the value of the deposit submitted.
Bidder X wants to apply for 100 MHz worth of eligibility points for spectrum at 3.5 GHz in all 172 service areas in accordance with the spectrum aggregation limit. By consulting the Eligibility Points and Opening Bids by Service Area table in Appendix 7, Bidder X notices that 3.5 GHz spectrum is not available in the following three service areas in British-Columbia: 4-153 Hope, 4-154 Victoria and 4-155 Nanaimo. Bidder X equally notices that he or she must place a deposit for 2964 worth of eligibility points in order to acquire 50 MHz of 3.5 GHz spectrum licences in the remaining service areas. By doubling the amount of points required for 50 MHz of 3.5 GHz spectrum licences, Bidder X calculates that he or she is required to prepare a deposit for 5928 worth of eligibility points. The financial deposit required is equal to $500 per eligibility point for the first two hundred (200) points and $3,000 per eligibility point requested thereafter. Bidder X therefore prepares a financial deposit in the amount of $17,284,000 (200 X $500+5728 X $3,000).
8.4 Auction Stages
There will be three stages of the auction, each containing an unspecified number of bidding rounds. The auction will begin and continue in stage one until bidding activity declines to a low level as determined by the Department (e.g. three consecutive rounds in which new bids are placed on licences representing ten percent or less of the total points associated with all licences up for bidding). At that time, the Department will have the discretion to move to the next stage. Bidders will be notified in advance of this decision, through the message function of the Auction Management System (AMS) A similar decision will be made later in the auction to move to stage three.
Bidders are advised to check their required activity levels after a stage change has occurred.
8.5 Activity Rule
Bidders are defined to be active on a particular licence in a given round if either they have the standing high bid from the previous round and have not withdrawn that bid, or if they submit a new bid in that round. Bidders begin any round with "bidder eligibility points" that determine their maximum activity level for that round. In Round 1, bidders' eligibility points are determined by their deposit (see Section 8.3). Bidder eligibility points may not be increased. In subsequent rounds, bidders' eligibility points are determined by the bidders' activity levels and the "activity requirement" in that stage of the auction. If bidders wish to maintain their eligibility points from the previous round, their activity level must correspond to a certain percentage of their eligibility points. This percentage is called the "activity requirement" and will vary depending upon the stage of the auction.
If bidders wish to maintain full eligibility, they must be actively bidding on licences whose points correspond to a certain percentage of their "bidder eligibility points". This percentage will vary depending upon the stage of the auction:
- in the first stage, the Department expects the figure to be in the range of 60% to 80%;
- in the second stage, the Department expects the figure will be increased to between 80% to 90%; and
- in the final stage, the figure will be increased to 100%.
The precise figure for the initial activity level will be communicated to all qualified bidders well before the auction begins. A bidder may also use an "activity rule waiver" (described in Section 8.7), to maintain eligibility for a round.
If a bidder falls short of the required activity level in any round, the bidder's eligibility point level shrinks proportionately so that the total "points worth" of licences on which he or she may bid in the next round will be equal to his/her actual activity level in the current round, multiplied by the reciprocal of the required activity level (e.g. 1/60% in stage one). It is important to note that where this calculation results in a required activity level that is not a whole number, the AMS will round this number up to the next highest integer to determine the minimum activity level required to remain eligible to bid on the same "points worth" of licences in the next round. Similarly, when determining the level of points for the next round, if the product of the actual activity level and the reciprocal of the activity level is not a whole number, then this number is rounded down.
It is also important to note that bidders will not add to their activity level by topping their own standing high bid on a licence. Bidders will be considered active on that licence by virtue of being the standing high bidder.
- Bidder X has 480 eligibility points. The auction is in stage one and the required activity level is, for example, 60% – which means Bidder X must bid on 288 points to maintain full eligibility. Bidder X is active on 300 points worth of licences. Since the actual activity (300) level exceeds the required activity level (288), Bidder X will maintain its full 480 eligibility points for the next round.
- Bidder Y has 1249 eligibility points. The auction is in stage two and the required activity level is, for example, 80%. To maintain his/her eligibility level of 1249 points, Bidder Y must be active on 1000 points worth of licences (1249 points times 80% gives 999.2 which is rounded up to 1000) in the current round. If Bidder Y is active on only 917 points worth of licences, then his/her eligibility in the next round will be 1146 points: (917 times (1/80%)) = 1146.25, which is rounded down to 1146.
- Bidder Z has 4975 eligibility points. The auction is in stage three, so the required activity level is 100%. Bidder Z is active on 3500 points worth of licences. In the next round, Bidder Z will only be able to bid on 3500 points worth of licences: (3500 times (1/100%)) = 3500.
8.6 Bid Increments
Bid increments, like activity rules, are necessary to hasten the auction's progress. To be acceptable, a new bid must be larger than the current standing high bid by the bid increment. Bid increments will be calculated both as a percentage of the standing high bid and in absolute terms of dollars per point. When a licence receives a new bid, the larger of the two increments will be applied to determine the acceptable bid price for the next round. The new bid price for that licence will be rounded up to the nearest three significant digits from the left.
These will vary with the auction stages. In the first stage the percentage increment will be set at the higher of 15% of the standing high bid and the absolute increment which will be set at $150/eligibility point (rounded up to nearest two significant digits). As the auction progresses, these increments will be changed to allow bidders greater precision in their bids and to keep the auction moving forward at an acceptable pace. Contemplated changes to the bid increment levels will be announced to bidders well ahead of their implementation.
8.7 Activity Rule Waivers
Activity rule waivers (waivers) are designed to prevent a bidder from losing eligibility points when the bidder does not satisfy the activity requirements in a given bidding stage. The purpose of waivers is to protect bidders against possible mistakes they might make during the course of the auction, or to allow them to maintain eligibility point levels in the case of technical or communication problems.
During the auction, when a bidder submits bids that are below the required activity level, a warning message will appear, advising them of this situation and telling them that they may either submit these bids along with a waiver to maintain full eligibility in the next round, or not submit a waiver and accept a reduction in points for the next round.
The use of the waiver is the default setting in the automated auction system. Thus, if technical problems prevent a bidder from accessing the auction system, a waiver will automatically be submitted on the bidder's behalf, and their points will remain unaffected for the next round. If a bidder has used all available waivers, then the "use a waiver" option will not appear, and an automatic waiver will not be submitted on the bidder's behalf.
Each bidder will be given five waivers at the beginning of the auction. As the auction progresses, and the number of rounds per day increases, the Department may, at its discretion, award additional waivers to each bidder.
8.8 Proactive Waivers
Bidders will also be able to submit "proactive" waivers to prevent the auction from closing. Once in the final stage, the auction will tentatively close when a round goes by without any bids or withdrawals being submitted (see Section 8.14). At that time, bidders will be advised via the automated auction system, that the auction will close unless a proactive waiver is submitted. Bidders may submit a proactive waiver by calling a specified telephone number within a specified time period.
All bidders who call within the specified time period to submit a pro-active waiver will have one of their waivers deducted, and the auction will continue. If no proactive waivers are submitted within the specified time period, then the auction will close.
8.9 Opening Bids
The Department is confident that the revenues generated from this auction will cover the relevant spectrum management costs and provide fair compensation to the Canadian public for the use of their spectrum resource. Therefore, the establishment of irreducible reserve prices is likely unnecessary. In order to "kick-start" the auction and avoid unnecessary delays in ultimately assigning licences, the Department proposed, in the consultation document, the establishment of opening bids.
Most respondents to the consultation document agreed with the absolute level of the opening bids proposed by the Department, in which a three-level schedule was also proposed. However, some respondents did suggest the opening bids in some of the larger cities were too high. The Department has decided to revise the opening bids for those areas and will use a two-level schedule, linking the number of people in a service area to the amount of the opening bid per point as follows:
- the opening bid is $625 per point for service areas with a population less than 300,000;
- the opening bid is $2,125 per point for service areas with a population of over 300,000.
Each of the licences has been assigned a specific number of eligibility points ("points") that are indicative of the population covered by the licence. One eligibility point is approximately equal to 25 MHz of spectrum and a population 20,000. Refer to Appendix 7 for a list of the opening bids for each of the 848 licences.
If no bids have been received on a licence in the initial rounds of the auction, the Department reserves the right to use its discretion in reducing the minimum opening bid for that licence. Any such reductions would be made in the first stage of the auction. Changes to the acceptable bid will be announced to bidders via the message feature of the auction software in the round in which licences are offered at the reduced bid amount.
8.10 Withdrawal of Bids and Related Penalties
Bidders will be given the opportunity to withdraw their standing high bids but, to encourage meaningful bids and to ensure that no loss of revenue occurs as a result of such withdrawals, a bid withdrawal penalty corresponding to the potential loss of revenue caused by this withdrawal will be imposed. If a licence that receives a withdrawal ultimately sells for less than the withdrawn bid, the standard withdrawal penalty will be the difference between the withdrawn bid and the next highest subsequent bid. In the case of multiple bid withdrawals on a single licence, at auction or a subsequent licensing process, the withdrawal penalty will be calculated based on the sequence of the withdrawn bids and the amounts withdrawn. Generally 12, no withdrawal penalty will be assessed for a withdrawn bid if either the subsequent winning bid or any of the intervening subsequent withdrawn bids, in either the auction or subsequent licensing process, equals or exceeds that withdrawn bid. Thus a bidder that withdraws a bid will not be subject to the standard withdrawal penalty if there is a subsequent higher bid at auction or a subsequent licensing process. It should be noted therefore, that withdrawal penalties can be incurred more than once on a given licence. See the examples below for more information.
To reduce the overall time of the auction, while not compromising efficiency, the Department will allow bidders to place new bids (and/or withdraw previously submitted bids) at the same time during a round, rather than having two distinct phases – one for bid submission and one for bid withdrawal – during each round. Note that if a bidder withdraws a bid on a licence in a round, the bidder is not considered to be active on that licence for that round and, therefore, unless bids are submitted on other licences, the bidder's eligibility points may decline.
When a standing high bid is withdrawn on a licence, and assuming that no new bids are submitted on that licence in that round, the status of standing high bidder on that licence will revert to Industry Canada in the next round, and the acceptable bid for the next round will be equal to the value of the withdrawn bid. If there is no bidding activity on that licence, then the Department reserves the right to reduce the required bid amount in a later round. The level of reduction will be determined by considering factors such as the stage of the auction and past bidding on that licence and similar licences.
In order to deter the potential misuse of withdrawals as a signalling mechanism or as a means of unduly once that bidder has withdrawn standing high bids in more than five rounds of the auction. For every additional withdrawn standing high bid, this penalty will be equal to the greater of: (a) 2% of the value of the withdrawn standing high bid; or, (b) $10,000, and will be in addition to the "standard" withdrawal penalties described above. This penalty will be assessed regardless of whether the ultimate selling price of the licence is above or below the withdrawn bid.
Standard Withdrawal Penalty:
Bidder X has made no withdrawals in the first seven rounds of the auction. In round 8, Bidder X withdraws a bid of $100,000 on Licence 2. Licence 2 is eventually sold for $80,000. Since the ultimate selling price of the licence is below the withdrawn bid, Bidder X owes a "standard" withdrawal penalty of $20,000.
Additional Withdrawal Penalty for Withdrawals in More Than Five Rounds:
Bidder Y withdraws one or more standing high bid(s) in each of five different rounds, for example, rounds 4, 7, 12, 19 and 24. The "standard" withdrawal penalties for these withdrawals will be calculated as the difference between the withdrawn bids and the next highest subsequent bid of these licences, assuming the former is greater than the latter. Any withdrawals made by Bidder Y in round 25 and beyond will now be subject to the "standard" withdrawal penalty plus the additional maximum of 2% of the withdrawn bid or $10,000. For example if in round 28, Bidder Y withdraws bids on one licence worth $100,000 and another licence worth $2,000,000. The additional withdrawal penalties would be $10,000 and $40,000 respectively. The penalties would be assessed regardless of whether the ultimate selling price of the licences exceeds their withdrawal bids.
Multiple Withdrawal Examples:
Bidder X bids $100,000 on a licence and withdraws that bid. Bidder Y subsequently bids $95,000 on this same licence and withdraws. At the auction's close, Bidder Z is the high bidder with a bid of $85,000. In this case, the standard withdrawal penalties are assessed as follows: Bidder X owes $5,000 ($100,000–$95,000). Bidder Y owes $10,000 ($95,000-$85,000)
Bidder X bids $50,000 on a licence and withdraws that bid. Bidder Y subsequently bids $40,000 on this same licence, and later withdraws that bid. The licence receives further bids such that Bidder Z eventually bids $45,000, and subsequently withdraws that bid. At the auction's close, Bidder A is the high bidder with a bid of $35,000. In this case, the standard withdrawal penalties are assessed as follows: Bidder X owes $5,000 ($50,000–$45,000). Bidder Z owes $10,000 No penalty is imposed on Bidder Y, because after his/her bid, Bidder Z promised to pay more than Bidder Y, thus freeing Bidder Y from owing withdrawal penalties.
8.11 Penalty for Exceeding Spectrum Aggregation Limit
Allowing bidders to hold standing high bids on licences within a service area that exceed the spectrum aggregation limit provides bidders with more flexibility to shift the focus of their bidding. However, this also provides the possibility for bidders to engage in anti-competitive behaviour by bidding on spectrum simply to preclude others from gaining access to the spectrum. To curtail this anti-competitive behaviour, the Department has decided that bidders will incur a penalty each time their new bids and standing high bids, exceed the spectrum aggregation limit of 100 MHz. It should be noted that FCFS FWA spectrum acquired prior to the auction will not count towards the spectrum aggregation limit during the auction.
To ensure that this penalty is an appropriate deterrent, it has been set equal to the greater of: (a) 2% of the value of bids placed on licences in service areas where the spectrum aggregation limit is exceeded; or (b) $10,000 for each round in which the spectrum associated with their bids exceeds the spectrum aggregation limit. This penalty will be assessed in addition to any applicable withdrawal penalties. Moreover, for each round in which a bidder exceeds the spectrum aggregation limit, the bidder will lose one of its waivers. If the bidder does not have any available waivers, any future waiver allocations will be reduced accordingly.
At the close of the auction, any bidder who is the standing high bidder on licences such that the bidder, his/her Affiliates and/or Associated Entities will exceed the aggregation limit in any service area must forfeit bids on all licences in this service area. The forfeiture penalties discussed in Section 9.3 will apply.
Note that the auction system will not provide a warning if a bidder has exceeded its spectrum aggregation limit.
8.12 Back-up Procedures
Bidders are strongly advised to prepare contingency plans and back-up facilities and locations, including multiple means of accessing the Internet, in the event of technical difficulties at their primary bidding locations. As discussed above, all bidders will also receive a number of activity rule waivers, which will protect their eligibility point level for several rounds in case they are unable to access the auction system.
In the Application to Participate in the Auction of Spectrum Licences for the 2300 MHz and 3500 MHz Bands (see Appendix 4), applicants are requested to designate up to three individuals who will have authority to place bids on behalf of the applicant. Each designated bidder will receive individual codes to participate in the auction. Having more than one individual designated as a bidder will strengthen back-up contingency plans for applicants in case of unforeseen problems. It is strongly advised that the designated bidders are identified in advance of the auction as the Department cannot guarantee that accounts will be set up in time if changes or additions are requested at the last minute.
As a last resort, bidders can call the Auction Centre to have Departmental staff submit bids on their behalf. This is a limited back-up facility for bidders who experience technical difficulties which prevent them from accessing the auction system. Only the individuals listed as designated bidders will be able to submit bids using this procedure. The telephone number for the Auction Centre will be provided to the qualified bidders prior to the start of the auction.
Departmental resources available for this task will be limited, and hence, it is possible that bidders may have to wait to have their bids submitted. Bidders must call early enough in the round to ensure that there is sufficient time for their bids to be submitted. Rounds will not be extended to provide extra time for the submission of these bids. While the Department will make its best efforts to submit bids on behalf of bidders, the Department assumes no responsibility if such bids are not submitted.
The Departmental representative taking such calls will use a prepared script and bidders must adhere to this script in giving the required information to the Departmental representative. All telephone transactions will be recorded.
The Department will prepare lists of one-time transaction code keys, which will be used to authenticate the bids transmitted by telephone. Each bidder will be issued a list of transaction code keys, each of which will be made up of eight randomly generated numbers. No two lists will be the same. Bidders will be bound by any bid made with their transaction code keys as agreed to in the Deed of Acknowledgement (refer to Appendix 5).
8.13 Withdrawal from the Auction
A bidder may have its irrevocable standby letter of credit returned upon presentation of a written request to the Manager, Wireless Networks (address provided in Section 1) if:
- the bidder's points are reduced to zero during the auction;
- the bidder is not potentially liable for any penalties; and,
- the bidder is not the standing high bidder on any licence.
Upon receipt of such a request, the Department will confirm that the conditions outlined above have been met and will then return the irrevocable standby letter of credit to the bidder.
8.14 Closure of the Auction
The auction will not close until stage three has been reached. Once the third stage has been reached, the auction will close when a round concludes with: (a) no bids or withdrawals being submitted and (b) no pro-active waivers having been submitted. Entering and removing the same bid within a single round will not prevent the auction from closing.
In exceptional circumstances, and after all participants have been notified in advance, any round can be declared as the final round. Similarly, exceptional circumstances such as a natural disaster, may result in the auction being delayed, suspended or cancelled.
The standing high bidder on each licence at the auction's close will be declared the provisional winners of those licences.
Licences which receive little or no bidding activity during the auction, and remain unsold at the close of the auction may be made available on a First-Come, First-Served basis. Licences that received significant bidding activity but remain unsold at the auction's close (e.g. withdrawn bids) or are not sold due to bid forfeitures (see Section 9.3), may be made available via a future re-auction. See Section 9.7 for details of the post-auction licensing procedures.
12 The word "generally" is used in this statement to differentiate the "standard" withdrawal penalty from any penalties that might be assessed if withdrawal have occurred in more than five rounds.
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