Consultation on a Framework to Auction Spectrum in the 2 GHz Range including Advanced Wireless Services
5. Licensing Process
The Department anticipates that demand will exceed supply and therefore will conduct an auction for AWS (1710-1755 MHz and 2110-2155 MHz), PCS expansion (1910-1915 MHz and 1990-1995 MHz) and 1670-1675 MHz bands. 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 spectrum management tool for those situations where it is appropriate to rely on market forces for the selection of licensees.
The Department proposes the use of the simultaneous multiple-round auction design used for the February 2004 auction of bands 2300 MHz and 3500 MHz.
The licences will have the following attributes, as detailed in the Framework for Spectrum Auctions in Canada (October 2001, Issue 2) document Footnote 23.
- Licences will be spectrum licences, which are defined as authorizations "in respect of the utilization of specified radio frequencies within a defined geographic area", as per subparagraph 5(1)(a)(i.1) of the Radiocommunication Act.
- Licences have a term of 10 years, with the possibility of renewal for an additional term of up to 10 years.
- Licences will be transferable and divisible in the secondary market.
- Licensees will have the maximum possible flexibility in determining the services they will offer and the technologies they will employ.
- Successful bidders in the auction will need to comply with Canadian ownership and control requirements in order to qualify for a radiocommunication carrier licence.
To clarify, licensees will have the maximum flexibility in determining (1) the commercial services they will offer within the terms of the spectrum utilization policy, and (2) the technologies they will employ within the technical parameters for the spectrum.
This spectrum represents an important mobile service resource for the advancement of Canadian telecommunications systems and the continued offerings of innovative and advanced wireless applications. A key justification for this spectrum reallocation is for facility-based radiocommunication carriers to develop new local distribution networks and expand existing networks to serve the Canadian public.
Licences auctioned will be radiocommunication carrier licences and, as such, provisional licence winners must demonstrate eligibility and meet the related ownership and control requirements, as outlined in the Radiocommunication Regulations, before licences are issued. For more information, refer to Client Procedures Circular 2-0-15, Canadian Ownership and Control (CPC-2-0-15), available on the Spectrum Management and Telecommunications website at: http://www.ic.gc.ca/eic/site/smt-gst.nsf/eng/sf01763.html.
5.2 Overview of the Simultaneous Multiple-round Auction
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. Information on the bids placed by all bidders will be made available after each round.
- 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 bid 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 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 in the document Framework for Spectrum Auctions in Canada.
5.3 Licence Term, Renewal and Implementation Requirements
To date, spectrum licences auctioned by Industry Canada have 10-year licence terms and mid-term implementation requirements. The Department determines whether a licence will be renewed 2 years prior to licence expiration.
In the United States, the FCC set the licence term for AWS as 15 years, with the possibility of 10-year terms for licence renewal. It has imposed a review 2 years prior to licence expiration to determine whether the licence should be renewed. It decided not to impose a mid-term implementation requirement - sometimes referred to as a use-it-or-lose-it requirement - as a condition of licence.
A longer licence term provides bidders with greater certainty of the period in which they will be able to recover the costs associated with delivering services. However, concerns exist regarding the need for a mid-term implementation requirement for longer licence terms.
An effective market calls for the reduction of barriers to entry and a productive secondary market. Ensuring that the spectrum is put to use, and having clear and effective enforcement mechanisms, will support reliance on secondary markets rather than government intervention. It is the Department's belief that establishing firm implementation rules, with clear and simple consequences for non-compliance, will encourage licensees to use the spectrum or establish commercial arrangements with third parties for the use of the spectrum, rather than risk losing the licence due to non-compliance.
As a result, the Department offers the following proposals for public comment.
The term of this licence will be for 10 years from the date the licence is issued. In year 8, licensees may apply for licence renewal for an additional term of up to 10 years as outlined below. The Department is not proposing to impose a mid-term implementation requirement as a condition of licence.
At a minimum of 2 years before the end of this term, and any subsequent terms, the licensee may apply for an additional licence term of up to 10 years. This application must include:
- a description of the licensee's current service in terms of geographic coverage and population served as well as a demonstration of the number of customers by service area; and
- a demonstration how it has met, and continued to meet all licence conditions. Upon receipt of such an application, where the Department foresees the possibility that it will not renew the licence in the circumstances then prevailing, or if renewal fees are contemplated, it may launch a public consultation process regarding the renewal of the licence.
In assessing an application for renewal, the Department will take into consideration:
- a satisfactory demonstration of substantial service in the licence area, and
- ongoing compliance with all licence conditions.
In addition to any determinations the Department may make with respect to the renewal criteria above, the Department may, after appropriate consultation, not renew a licence for other reasons, such as:
- changes or planned changes to the allocation or usage of the spectrum in question;
- national security, treaty or other international obligations or requirements;
- any other pressing spectrum management issues.
It should be noted that the licence is subject to relevant provisions in the Radiocommunication Act and the Radiocommunication Regulations. As a result, the Minister has the power to amend the terms and conditions of the spectrum licence and to suspend or revoke a radio authorization (paragraphs 5(1)(b) and 5(2) of the Radiocommunication Act).
As proposed above, the renewal of the AWS licence will depend on, among other things, the licensees meeting their licence conditions and a satisfactory demonstration of substantial service in the licence area. The Department recognizes that a variety of business plans and technologies may be employed in these bands across markets of various sizes, leading to various deployment strategies. Therefore, consideration should be given to quantify what constitutes substantial service that would demonstrate an acceptable level of spectrum usage.
The Department may post a notice on the Spectrum Management and Telecommunications website when applications for renewal are received.
Comments are sought on the licence term, implementation and renewal proposals. Specifically, comment is sought on:
- the proposal to use a 10-year licence term;
- whether an interim implementation requirement should be imposed;
- if yes, respondents should provide a rationale and an explanation of the implementation parameter(s) the Department should consider, the time frame for such a measure and the means of determining compliance (e.g. technical measurement methods, affidavit, number of subscribers in area);
- whether the renewal expectancy provisions and process are suitable;
- if not, respondents should provide a description of the rationale for different approaches;
- whether requiring application for renewal 2 years before licence expiry is appropriate;
- the means of determining compliance (e.g. technical measurement methods, affidavit, number of subscribers in area); and
- the provisions the Department should consider when a licensee is determined to not fully meet the renewal expectancy requirements (e.g. the revocation for part or all of the spectrum or geography).
5.4 Conditions of Licence
The conditions of licence will be clearly stipulated prior to the auction. The Department proposes the following conditions for the AWS, PCS expansion and 1670-1675 MHz spectrum bands.
- Licence Term: The term of this licence will be for 10 years from the date of licence issuance. At a minimum of 2 years before the end of this term, and any subsequent terms, the licensee may apply for licence renewal for an additional licence term of up to 10 years, as outlined in section 5.3.
- Licence Transferability and Divisibility: The licensee may apply to transfer its licence(s) in whole or in part (divisibility), in both the bandwidth and geographic dimensions. The Department may define a minimum bandwidth and/or geographic dimension (such as the grid cellFootnote 24) to the proposed transfer. Systems involved in such a transfer shall conform to the technical requirements set forth in the applicable standards mentioned in previous sections.
- Departmental approval is required for each proposed transfer of a licence, whether the transfer is in whole or in part. The licensee must apply to the Department in writing. The transferee(s) must also provide an attestation and other supporting documentation demonstrating that it meets the eligibility criteria and all other conditions, technical or otherwise, of this licence.
- Eligibility Criteria: A licensee must be eligible to become a radiocommunication carrier and as such, must comply on an ongoing basis with the eligibility criteria in section 10(2) of the Radiocommunication Regulations. The licensee must notify the Minister of Industry of any change which would have a material effect on its eligibility. Such notification must be made in advance for any proposed transactions within its knowledge. For more information, refer to the CPC-2-0-15.
- Displacement of Incumbents: Licensees must comply with the transition policy requirements as set out in the final policy document.
- Radio Station Installations: While site-specific radio licences will not be required for each radio station, licensees must ensure that radio stations are installed and operated in a manner that complies with Industry Canada's Client Procedures Circular 2-0-03, Environmental Process, Radiofrequency Fields and Land-Use Consultation (CPC-0-03), as amended from time to time, and is available at: http://www.ic.gc.ca/eic/site/smt-gst.nsf/eng/sf01031.html.
- The Department has conducted a thorough study and public consultation on the environment related to Canada's authorization processes for radiocommunication antennas and their supporting structures. The objective of the review was to examine possible improvements to Industry Canada's existing antenna tower siting policies and approval procedures. While the Department has yet to release the updated antenna procedures, comments are sought on related issues that parties may consider relevant to AWS.
- Provision of Technical Information: A list of the minimum radiocommunication installation data elements required for the Department's technical database is provided in Appendix B of Client Procedures Circular 2-1-23, Licensing Procedure for Spectrum Licences for Terrestrial Services (CPC-2-1-23) which can be found at http://www.ic.gc.ca/eic/site/smt-gst.nsf/eng/sf01875.html. The Department recognizes that each radiocommunication system and/or service is unique and for that reason, the particulars concerning the provision of updated technical information will be specified upon issuance of the spectrum licence.
- Compliance with Legislation, Regulations and Other Obligations: The licensee is subject to, and must comply with, the Radiocommunication Act, the Telecommunications Act, the Radiocommunication Regulations and the International Telecommunication Union's Radio Regulations pertaining to its licensed radio frequency bands. The licence is issued on condition that the certifications made in the application materials are all true and complete in every respect. The licensees must use the assigned spectrum in accordance with the Canadian Table of Frequency Allocations and the stated spectrum policy.
- International Coordination: Licensees must comply with the current and future agreements established with other countries. While frequency assignments are not subject to site licensing, licensees may be required to furnish all necessary technical data to Industry Canada for each relevant site. However, it is expected that coordination will be carried out by licensees. Licensees will be encouraged to enter into mutually acceptable sharing agreements that will facilitate the reasonable and timely development of their respective systems. These agreements provide the basis for coordination in the border area.
- Lawful Intercept: Licensees who will use the spectrum for circuit-switched voice telephony systems must, from the inception of service, provide for and maintain lawful interception capabilities as authorized by law. The requirements for lawful interception capabilities are provided in the Solicitor General's Enforcement Standards for Lawful Interception of Telecommunications. These standards may be amended from time to time following consultation with the Solicitor General of Canada and the licensees. Licensees may request the Minister to forbear from enforcing certain assistance capability requirements for a limited period. The Minister, following consultation with the Solicitor General of Canada, may exercise his power to forbear from enforcing a requirement or requirements where, in the opinion of the Minister, the requirement(s) is (are) not reasonably achievable. Forbearance requests must include specific details and dates when compliance with requirement(s) can be expected. Applicants are strongly advised to note that if standards are developed for router-based networks, the requirement to provide lawful interception capability for such traffic may be imposed via a licence condition or otherwise.
- Research and Development (R&D): All licensees must invest, as a minimum, 2% of their adjusted gross revenues resulting from their operations in this spectrum averaged over 5 years for the duration of the licence, in eligible research and development activities related to telecommunications. Eligible research and development activities are those that meet the definition of scientific research and experimental development adopted in the Income Tax Act. Adjusted gross revenues are defined as total service revenues, less inter-carrier payments, bad debts, third-party commissions, and provincial and goods and services taxes collected. As was the case in the 2.3/3.5 GHz auction processes, businesses with less than $5 million in annual gross operating revenues are exempt from R D expenditure requirements. If the licence is transferred to any eligible entity prior to the expiration of its term, the condition of licence relating to investment in research and development will continue to apply on the initial transfer of the licence and on any subsequent transfer until the term of this licence expires. Prior to a transfer, in whole or in part of this licence, the proposed transferee must undertake to ensure that the sum of the investment it will make in eligible research and development activities and all investments made by prior licensees in eligible research and development activities equals, as a minimum, 2% of the aggregated adjusted gross revenues resulting from all operations in this spectrum averaged over 5 years for the duration of the licence. An attestation signed by the proposed transferee setting out the undertaking must accompany the licence transfer notification to be submitted to the Department by the licensee prior to the transfer being effected. To facilitate compliance with this condition of licence, the licensee should consult the Department's Guidelines for Compliance with the Radio Authorization Condition of Licence Relating to Research and Development which can be found on the Spectrum Management and Telecommunications website at http://www.ic.gc.ca/eic/site/smt-gst.nsf/eng/sf01638.html.
- Annual Reporting: Licensees must submit an annual report for each year of the licence term indicating continued compliance with all licence conditions and including the following information;
- an update on the implementation of Advanced Wireless Services, including the number of hub and subscriber sites installed, type of service delivered (high-speed Internet, voice, etc.), level of service (data rate), number of subscribers, as well as the population covered;
- existing audited financial statements;
- audited Statement of Research and Development Expenditures with an accompanying Auditor's Report (where licensees are claiming an exemption based on an adjusted gross revenue of less than $5 million, supporting financial statements must be provided); and
- a copy of any existing corporate annual report for the licensee's fiscal year with respect to the authorization.
The reports are to be submitted, in writing to Industry Canada, within 120 days of the licensee's fiscal year-end. Where a licensee holds multiple licences, the reports should be broken down by service area. Confidential information provided will be treated in accordance with Section 20(1) of the Access to Information Act.
The Department seeks comments on the proposed conditions for the AWS, PCS expansion and 1670-1675 MHz spectrum bands.
5.5 Post-auction Licensing Process
The Department may consider making unassigned licences available for licensing through an alternative process, which could include a re-auction, at a later date following the close of the auction. The timing and form of such a process will depend on the demand for the available licences. The Department may conduct a public consultation should the Department consider it in the public interest.
The Department seeks comment on all aspects of the proposed post-auction licensing process for AWS, PCS expansion and 1670-1675 MHz spectrum.
6. Financial Aspects of the Auction
6.1 Opening Bids
The Department is of the view that in certain areas of the country, the spectrum being offered in this auction is of significant value. The Department is confident that the revenues generated will cover the relevant spectrum management costs and provide fair compensation to Canadians for the use of the spectrum resource for commercial gain. As such, the Department proposes to establish opening bids that will help bidders reach selling prices for available licences in a reasonable period of time.
6.1.1 Opening Bids for AWS spectrum and for Additional PC spectrum
Each of the licences has been assigned a specific number of eligibility points (hereafter referred to as points) that are indicative of the population covered by the licence. One eligibility point is approximately equal to 10 MHz of spectrum and a population of 10,000.
To reduce potential barriers to entry in the less populated areas, the Department proposes a 3-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 $0.04 per point for service areas with a population less than 200,000;
- the opening bid is $0.06 per point for service areas with a population of 200,001 to 2,000,000;
- the opening bid is $0.12 per point for service areas with a population of over 2,000,000.
Because licences are to be offered at three different tier sizes, it is important that the larger tiers reflect their composition so the opening bid for a Tier 3 service area will be equal to the sum of the opening bids for the underlying Tier 4 service areas. Similarly, the opening bid for a Tier 2 service area will be equal to the sum of the opening bids for the underlying Tier 3 service areas. As a result, the price per point for Tiers 2 and 3 becomes a weighted average of the underlying Tier 4 service areas.
The population coverage per point has been reduced to 10,000 from 20,000 since the auction of spectrum licences in the bands 2300 MHz and 3500 MHz. As a result, points relate more directly to population size in individual service areas. In the 2.3/3.5 GHz auction, 36 service areas ranging in size from Golden, B.C., with a population of only 7,153, to Grand Falls, N.L., with a population of 29,665, were valued at one point. Under the suggested coverage, only four service areas are valued at one point with the population range from 7,154 (Golden, B.C.) to 14,407 (Vegreville, Alta.).
All service areas, population, $/MHz/pop, points and opening bids are contained in Annex 1.
6.1.2 Opening Bids for 1670-1675 MHz
Each of the Tier 2 licences has been assigned a specific number of eligibility points that are indicative of the population covered by the licence. One eligibility point is approximately equal to 5 MHz of spectrum and a population 10,000.
Eligibility points and associated opening bids have been established at the Tier 2 level for all service areas based on the value of $0.01/MHz/pop rounded to the nearest 10,000 (see Annex 2).
6.2 Pre-Auction Deposits
In order to enhance the integrity of the auction, the Department requires that all bidders submit a pre auction financial deposit with their auction application. The deposit is to be in the form of a certified cheque or money order payable to the Receiver General of Canada, or an irrevocable standby letter of credit.
The Department proposes to determine the value of the pre-auction financial deposit based on the licences on which the applicant wishes to be eligible to bid. Each of the licences has been assigned a specific number of eligibility points that are approximately proportionate to the population covered by the licence. For AWS and PCS spectrum, one eligibility point is approximately equal to 10,000 in population per 10 MHz of spectrum.
The Department considers that it is appropriate to require bidders to provide the Department with a deposit to ensure that the integrity of the auction is maintained. At the same time however, the Department does not want to disadvantage those applicants who may wish to develop business plans in a limited number of service areas. Therefore, the Department proposes that the financial deposit be equal to $4,000 per eligibility point for the first 200 points and $6,000 per eligibility point requested thereafter.
An individual bidder wishing to acquire the equivalent of one national, 5+5 MHz AWS or PCS licence would have to purchase 3,002 points, which would require a financial deposit of $17,612,000 (i.e. 4000 x 200 + 6000 x 2,802). National coverage in the AWS band at either the Tier 3 or Tier 4 level is contained in Annex 1 of this document which provides the eligibility points associated with each of the licences. (A Tier 2 national licence would be 15+15 MHz, and would require a financial deposit of $53,636,000.) Note that the opening bids (described in Section 6) and the required deposit are, in general, different amounts. Financial deposit(s) will be returned to any applicant that is found not to be a qualified bidder, to any applicant that provides written notification to the Department of its withdrawal from the process prior to the auction's commencement, and to any bidder whose eligibility is reduced to zero during the auction and who is not potentially liable for any penalties.
For spectrum in the band 1670 MHz to 1675 MHz, the financial deposit will be equal to $500 per point or $150,500 for national coverage.
The Department seeks comments on the opening bids and pre-auction deposits for AWS licences.
6.3 Bid Payment
Winning bidders will be required to submit 20% of their high bids and 100% of any withdrawal penalties incurred within 10 business days of the auction's close. This payment will be non refundable. If the winning bidder fails to make this initial payment in a timely manner, the licence will not be issued and the bidder will be subject to the applicable forfeiture penalty. The remaining 80% of the high bids will be due within 30 business days of the auction's close. Failure by the winning bidder to make this final payment in a timely fashion will also result in the licence not being issued, and again, the bidder will be subject to the applicable forfeiture penalty.
It is also important to note that beyond the payment of the winning bid, no other licence fees or payments will be required for the duration of the licence term, as per subsection 5(1)(1.3) of the Radiocommunication Act.
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