Licensing Framework for the Auction for Spectrum Licences for Advanced Wireless Services and other Spectrum in the 2 GHz Range

6. Auction Design and Rules

6.1 Key Features of the Simultaneous Multiple-Round Ascending Auction (SMRA) Design

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 SMRA auction that will be used are listed below.

  • A related set of licences will 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.) Information on the bids placed by all bidders will be made available after each round.
  • Opening bids are set by Industry Canada as outlined in Appendix B. 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 only be able to choose whether or not to submit the new bid. This format allows rounds to be shorter and more frequent, because the mechanics of entering and checking bids are simpler, and because the prices never "jump" by unexpected amounts, thus making them more predictable. This also reduces the need for frequent executive oversight during the bidding, which saves overall costs.
  • When two or more bids are submitted on the same licence in the same round, a tie occurs and the standing high bidder in the next round will be determined by a random selection process built into the auction software.
  • 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 final stage in which no new bids, withdrawals, or proactive waivers are submitted (cessation of bidding). The standing high bidders on each licence on cessation of bidding will be deemed the provisional winners of those licences.

All the details of the auction format are discussed more fully below.

6.2 Bidder Eligibility Points

Each of the 292 licences has been assigned a specific number of eligibility points ("points") that are proportionate to the population covered by the licence. One eligibility point is approximately equal to 100,000 in population per 5 MHz of spectrum. Refer to Appendix B 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 a bidder's initial level of eligibility points and is also used to determine the financial deposit that must be submitted with the application. Bidder eligibility points may not be increased once the auction has started.

The Department will assign the same eligibility points for a 10 MHz licence in the AWS band as it will for a 10 MHz block in the PCS band, whereas eligibility points for a 5 MHz licence in the band 1670-1675 MHz will be half of those assigned for the AWS and PCS bands. Points have been established to provide bidders with maximum flexibility to transfer them among the available licences.

The financial deposit will be $40 000 per eligibility point for the first 300 points and $140 000 per eligibility point requested thereafter. Refer to Section 5.4.1 for further information on calculating financial deposits.

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.

Example:

Bidder X wants to apply for the 10 MHz "C" licence, nation-wide. By consulting Appendix B, Tier 2, 'Eligibility Points' and 'Opening Bid' for 10 MHz-Block C and PCS-Block G, Bidder X determines she needs to acquire 620 eligibility points for the fourteen Tier 2 service areas. The financial deposit required is equal to $40 000 per eligibility point for the first three hundred (300) points, and $140 000 per eligibility point thereafter. Bidder X therefore prepares a financial deposit in the amount of $56 800 000 (300 × $40 000 + 320 × $140 000).

6.3 Auction Stages

There will be three stages in this part of the auction, each containing an unspecified number of bidding rounds (refer to Section 7, Second Phase of the Auction, for details). The auction will begin and continue in Stage One until bidding activity declines to a low level typified by three consecutive rounds in which new bids placed on licences represent ten (10) percent or less of the total points associated with all available licences. At that time, the Department will have the discretion to move to Stage Two. Bidders will be notified in advance of this decision, through the message function of the 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.

6.4 Activity Rule

Bidders are defined as active on a particular licence in a given round if they either have the standing high bid from the previous round (and have not withdrawn that bid), or 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 to bid is determined by the number of points acquired with their financial deposit (see Section 5.4.1). In subsequent rounds, bidders' eligibility to bid is determined by their activity level in the previous round. Therefore, if bidders wish to maintain their eligibility from the previous round, their activity level must correspond to a certain percentage of their eligibility points in each round. This percentage is called the "activity requirement", which will increase as the auction progresses, as follows.

  • in Stage One, the Department expects the figure to be in the range of 70% to 80%;
  • in Stage Two, the Department expects the figure will be increased to between 80% to 90%; and
  • in Stage Three, 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 6.6), to maintain eligibility for a round.

If bidders fall short of the required activity level in any round, their eligibility point level will shrink proportionately, so that the total "points worth" of licences on which they may bid in the next round will be equal to their actual activity level in the current round, multiplied by the reciprocal of the required activity level (e.g. 1/0.7 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, because they are already considered to be active on that licence by being the standing high bidder.

Examples:

  1. Bidder X is seeking a national footprint and has 620 eligibility points. The auction is in Stage One, and the required activity level is 70%; which means Bidder X must bid on 434 points worth of licences to maintain full eligibility. Bidder X is already the standing high bidder on 450 points worth of licences, and therefore exceeds the required activity level without entering any new bids, and will maintain full eligibility (620 points) for the next round.
  2. Bidder Y has 2 400 eligibility points. The auction is in Stage Two, and the required activity level is 90%. To maintain this level of eligibility, Bidder Y must be active on 2 160 points worth of licences (2 400 points times 90%) in the current round. If Bidder Y is active on only 1 700 points worth of licences, then his/her eligibility in the next round will be 1 888 points (1 700 multiplied by the reciprocal of the required activity level and rounded down—i.e. 1 700 × 1/0.9).
  3. Bidder Z has 620 eligibility points. The auction is in Stage Three, and the required activity level is 100%. Bidder Z is active on 620 points worth of licences. In the next round, Bidder Z must bid on 620 points worth of licences (620 × 1/1.0).

6.5 Bid Increments

Bid increments, like activity rules, are used 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 and the larger of the two increments will be added to the standing high bid to determine the acceptable bid price for that round. The new bid price for that licence will be rounded up to the nearest three significant digits from the left.

Bid increments will vary with the auction stages. In Stage One, the percentage increment will be set at the higher of 15% of the standing high bid or the absolute increment which will be set at $2 000/eligibility point. In the later stages of the auction, the bid increment will diminish 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.

6.6 Activity Rule Waivers

Activity rule waivers (waivers) are designed to prevent bidders from losing eligibility points when, for example, they suffer from technical or communication problems, or some other internal issue that prevents them from satisfying the activity requirements in a given bidding round.

During the auction, if a bidder does not meet the required activity level, a warning message will appear, advising of this situation and notifying that the bidder may either submit more bids or a waiver to maintain full eligibility in the next round, or not submit bids or a waiver and accept a reduction in their eligibility to bid in further rounds.

The use of a waiver is also 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 no reduction in eligibility will occur. 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 that 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.

6.7 Proactive Waivers

Bidders will be able to submit "proactive" waivers to prevent the cessation of bidding. In Stage Three of the auction, when a round ends without any bids or withdrawals being submitted (see Section 6.12), bidders will be advised via the AMS that bidding will cease unless a proactive waiver is submitted. Bidders will be given the opportunity to submit a proactive waiver by calling an assigned telephone number within a specified time period.

All bidders who call within the specified time period to submit proactive waivers will have one of their waivers deducted, and the auction will continue with the next scheduled round. If no proactive waivers are submitted within the specified time period, no further bidding will take place.

6.8 Opening Bids

Opening bids have been established for all licences based on service area population, current licence fees for cellular and PCS licences, and the 2001 PCS auction results. Opening bids are listed in the tables provided in Appendix B.

The Department maintains the option of reducing opening bids for licences at any time to encourage bidding activity. Given that the second phase of the auction will deal with unassigned licences, the likelihood of reducing opening bids will be low. However, in the event such action is taken, the following procedure will be followed.

For set-aside spectrum, the opening bid values may be reduced only if bidding activity reveals a need to reduce opening bid values for non set-aside spectrum. Should the Department elect to reduce opening bid values, change to the opening bid values will be announced via the message feature of AMS, in the round in which licences are offered at the reduced opening bid value.

6.9 Withdrawal of Bids and Related Penalties

Bidders may 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 auction revenue caused by this withdrawal will be imposed.

If a bid is withdrawn from a licence that ultimately sells for less than the withdrawn bid, the withdrawal penalty will equal the difference between the withdrawn bid and the ultimate selling price.

In the case of multiple bid withdrawals on a single licence, at auction or in a subsequent licensing process, the withdrawal penalty will be calculated based on the sequence of the withdrawals and bids.

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 the auction equals or exceeds the initial withdrawn bid. Thus a bidder who withdraws a bid will not be subject to a withdrawal penalty if there is a subsequent higher bid in this auction. If a higher bid is not submitted until a subsequent licensing process, the withdrawal penalty levied in this auction will be returned at that time.

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 to bid in subsequent rounds will decline.

When a standing high bid is withdrawn, 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, 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 a means of unduly delaying the cessation of bidding, the Department will impose an additional penalty on a bidder if that bidder withdraws standing high bids in more than five rounds of the auction. For the sixth and 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 withdrawal penalty described above. This penalty will be assessed regardless of whether the ultimate selling price of the licence is above or below the withdrawn bid.

Examples:

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, which eventually receives a winning bid of $80 000. Since the ultimate winning bid for the licence is below the withdrawn bid, Bidder X owes a withdrawal penalty of $20 000.

Additional Withdrawal Penalty for Withdrawals in More Than Five Rounds:

Bidder Y withdraws five standing high bids over a series of rounds. The associated withdrawal penalties are calculated as the difference between the withdrawn bids and the subsequent winning bid for these licences, assuming the former is greater than the latter. Any subsequent withdrawals made by Bidder Y are then subject to an additional withdrawal penalty, equal to the maximum of 2% of the withdrawn bid or $10 000.

For example, if Bidder Y withdraws bids on licences worth $100 000 and $2 000 000, the additional withdrawal penalties would be $10 000 and $40 000 respectively. These penalties would be assessed regardless of the ultimate winning bids for these licences.

Multiple Withdrawal Penalty:

Bidder X bids $100 000 on a licence then withdraws the bid. Bidder Y subsequently bids $95 000 on the same licence then withdraws the bid. Upon cessation of bidding, Bidder Z is the high bidder with a bid of $85 000. In this case, Bidder X owes $5 000 ($100 000-$95 000) in withdrawal penalties, and Bidder Y owes $10 000 ($95 000-$85 000).

Bidder X bids $50 000 on a licence then withdraws the bid. Bidder Y subsequently bids $40 000 on this same licence, and later withdraws the bid. The licence receives further bids, whereby Bidder Z eventually bids $45 000, and subsequently withdraws the bid. Upon cessation of bidding, Bidder A is the high bidder, with a bid of $35 000. In this case, Bidder X owes $5 000 ($50 000-$45 000), and 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.

6.10 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 Designated Bidders Form (Attachment F of the Application Form), applicants are requested to designate up to three individuals who will have authority to place bids on their behalf. 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 be 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 use this option. 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. It is the responsibility of bidders wishing to use this option to call early enough in the round to ensure there is sufficient time for their bids to be submitted. Rounds will not be extended to accommodate these bidders. While the Department will make its best effort 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 Attachment B of the Application Form).

6.11 Withdrawal from the Auction

A bidder may have its irrevocable standby letter of credit returned upon presentation of a written request to the AWS Auction Manager (address provided in Section 1.2) 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.

6.12 Cessation of Bidding

Under normal circumstances, bidding will cease in Stage Three of the auction, when a round concludes with:

(a) no bids or withdrawals being submitted; and,
(b) no proactive waivers having been submitted.

Entering and removing the same bid within a single round will not prevent the cessation of bidding.

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 upon cessation of bidding will be declared the provisional winner of those licences.

Licences that remain unsold upon cessation of bidding may be made available upon continuation of the auction in a second phase.


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