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Licensing Framework to Auction Spectrum in the Bands 849-851 MHz and 894-896 MHz for Air-Ground Services

March 2009
Spectrum Management and Telecommunications

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Licensing Framework to Auction Spectrum in the Bands 849-851 MHz and 894-896 MHz for Air-Ground Services
(PDF, 369 KB, 26 pages)

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1. Introduction

1.1 Intent

This document entitled Licensing Framework to Auction Spectrum in the Bands 849-851 MHz and 894-896 MHz for Air-Ground Services (DGRB-006-09), serves as a companion document to Part A of the Spectrum Utilization Policy and Consultation on a Framework to Auction Spectrum in the Bands 849-851 MHz and 894-896 MHz for Air-Ground Services published in the Canada Gazette (DGRB-004-08) on December 6, 2008. This licensing framework document elaborates the auction licensing process for air-ground1 services in these bands, as well as auction application procedures, licence conditions, and technical and operational considerations.

1.2 Background

In October 2006, Industry Canada released a consultation paper through Canada Gazette (DGTP-011-06) proposing policy and regulatory changes in order to permit the provision of new enhanced air-ground services, taking into account the benefits of regional harmonization. The Department received only one response to the consultation. The comments generally supported the proposed policy modifications, including band plan and technical requirements. The decisions were outlined in Part A of the document entitled Spectrum Utilization Policy and Consultation on a Framework to Auction Spectrum in the Bands 849-851 MHz and 894-896 MHz for Air-Ground Services.

The Department makes no representations or warranties about the use of this spectrum for particular services. Applicants should be aware that this auction represents an opportunity to become a licensee, subject to certain conditions which may include compliance with the Canadian Aviation Regulations and applicable standards depending on the services offered. An Industry Canada auction does not constitute an endorsement by the Department of any particular service, technology or product, nor does a spectrum licence constitute a guarantee of business success. Applicants should perform their individual due diligence before proceeding, as they would with any new business venture.

Departmental documents cited in this document are available on Industry Canada's Spectrum Management and Telecommunications website at http://www.ic.gc.ca/spectrum. All enquiries should be addressed to:

Manager, Spectrum Auctions
Radiocommunications and Broadcasting Regulatory Branch
Industry Canada
300 Slater Street, 15th floor
Ottawa, Ontario
K1A 0C8
Telephone: 613-990-8881
Fax: 613-991-3514
E-mail: spectrum.auctions@ic.gc.ca

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2. Band Plan and Available Licences

The spectrum is divided into two paired blocks and each will be licensed on a Tier 1 (national) basis as follows:

Spectrum Licence Frequency Band Amount of Spectrum
A 849-850.5 / 894-895.5 MHz 3 MHz
B 850.5-851 / 895.5-896 MHz 1 MHz

Bids can be made as a package bid of both licence blocks and/or on individual licence blocks. See Section 6.3 below for details.

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3. Ministerial Authority

It should be noted that spectrum licences are 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 licence and to suspend or revoke a radio authorization (paragraphs 5(1) and 5(2) of the Radiocommunication Act).

With respect to terms and conditions, paragraph 5(1) of the Act states that the Minister may:

"…fix the terms and conditions of any such licence, certificate or authorization including, in the case of a radio licence and a spectrum licence, terms and conditions as to the services that may be provided by the holder thereof;"

Paragraph 5(2) of the Act further states:

"(2) The Minister may suspend or revoke a radio authorization
(b) after giving written notice to the holder and giving the holder a reasonable opportunity to make representations to the Minister with respect thereto, where the Minister is satisfied that
(i) the holder has contravened this Act, the regulations or the terms or conditions of the radio authorization,…"

Section 40 (Assignment of Frequencies) of the Radiocommunication Regulations also applies; it states:

"The assignment of a frequency or frequencies to a holder of a radio authorization does not confer a monopoly on the use of the frequency or frequencies, nor shall a radio authorization be construed as conferring any right of continuing tenure in respect of the frequency or frequencies."

The full text of the Radiocommunication Act and related regulation may be viewed at http://laws.justice.gc.ca/en/R-2/index.html.

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4. Licence Conditions

Licensees must be fully aware of their obligations with respect to licence terms and conditions. Industry Canada will monitor compliance and take any necessary action to ensure compliance and enforce the provisions of the Radiocommunication Act and Radiocommunication Regulations.

Comments received indicated a general agreement with the Department's proposed licence conditions. However, there were specific comments with regard to the licence term and renewal, research and development, annual reporting and implementation of spectrum usage. These comments are discussed below.

For a complete listing of licence conditions as they will appear on the licence, please refer to Appendix A of this document.

4.1 Licence Term and Renewal

In the consultation paper, Industry Canada proposed that the spectrum licences have a ten-year term. A comment received suggested that an indefinite licence term should be implemented or, at the very least, a twenty-year licence term. In order to harmonize spectrum use with the U.S.'s ten-year licence term, the Department will proceed with its proposed licence term.

The licences will be issued for a ten-year term from the date of issuance with a high expectation of renewal for a further ten-year term unless a breach of licence condition has occurred, a fundamental re-allocation of spectrum to a new service is required, or an overriding policy need arises. The licence renewal for a subsequent term will be undertaken prior to the end of the licence term as outlined in the document Framework for Spectrum Auctions in Canada, which is available at http://www.ic.gc.ca/eic/site/smt-gst.nsf/eng/sf01626.html. Note that this document is being revised via a separate consultation to provide further details on the renewal process. The renewal process developed through that consultation may apply to all long-term spectrum licences, including air-ground.

It should also 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, at any time, to amend the terms and conditions of the spectrum licence and to suspend or revoke a radio authorization pursuant to paragraphs 5(1)(b) and 5(2) of the Radiocommunication Act.

4.2 Research and Development (R&D)

Currently, licensees operating as radiocommunication carriers holding licenses obtained through a competitive licensing process are required to invest a percentage of their adjusted gross revenues on research and development (R&D) and submit annual R&D statements demonstrating their level of investment. A comment received suggested that the R&D investment is no longer required as a result of the current development stage of the industry. When first granting spectrum licences in the 1990s, this condition of licence was established in order to stimulate research and development in the telecommunications sector. Today, the wireless industry is thriving. The Department also acknowledges that it is in the best interest of all wireless companies to undertake R&D activities on an ongoing basis in order to be competitive in the marketplace and licensees exceed the required level of R&D spending.

These licences will maintain an R&D investment condition of licence. The Department intends to review the general policy of requiring such a condition of licence as part of a proposed Consultation on Revisions to the Framework for Spectrum Auctions in Canada in the near future.

4.3 Annual Reporting

The Department had proposed that licensees submit an annual report for each year of the licence term within 120 days of their fiscal year end. A comment received indicated that there was a preference for providing annual reports on July 1 of each year. The Department will proceed with the proposed submission schedule of 120 days after the licensee's fiscal year end as a default. However, an alternate date for report submission proposed by a licensee will be considered.

4.4 Implementation of Spectrum Usage

The Department proposed taking into account implementation of spectrum usage at the time of renewal. A comment received suggested that a roll-out condition be included, stipulating that the licensee must provide substantial coverage to Canadian airspace within two years of the licence issuance. In the past, the Department has imposed specific roll-out conditions for some spectrum licences. However, in this case, the Department proposes allowing the licensees to determine the most appropriate time to deploy their services and adjust their plans in reaction to technology and changes in business and market conditions. As a result, the Department will proceed with the proposed review of the implementation of spectrum usage prior to renewal. Two years prior to the end of the licence term, the licensee must demonstrate implementation of stations covering 75% of Canadian air routes. Any deployment below 75% or using another indicator will be taken into consideration by the Department in determining whether to renew the licence in whole, in part or not at all and will be addressed in the renewal consultation.

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5. Licensing Process

This licensing process is conducted in accordance with the Framework for Spectrum Auctions in Canada (October 2001), which is available at: http://www.ic.gc.ca/eic/site/smt-gst.nsf/eng/sf01626.html. Licensees should also familiarize themselves with Client Procedures Circular CPC-2-1-23, Licensing Procedure for Spectrum Licences for Terrestrial Services, as amended from time to time, which is available at: http://www.ic.gc.ca/eic/site/smt-gst.nsf/eng/sf01875.html.

In the licensing consultation, the Department proposed a sealed-bid, second-price auction process, also known as a "Vickrey" auction, for this licensing process. One comment received indicated some concern with the Department's choice of auction process and suggested that the Department should rely on the Simultaneous Multiple Round Ascending (SMRA) design used in the previous five auctions. In view of the fact that only two licences are being offered and limited interest is anticipated, the sealed-bid, second-price design presents a simplified, expedient and transactionally efficient alternative to the SMRA auction design, without any anticipated loss in outcome efficiency. With the Vickrey design, the optimal bidding strategy is for bidders to bid the true licence values rather than over- or under-bidding. This bidding will facilitate an outcome where the bidder with the highest valued use will win and pay the second highest price. The price paid under either the Vickrey or a competitive SMRA auction is expected to be comparable. The Department will proceed with the proposed sealed-bid, second-price auction design.

The process by which interested parties may apply to participate in the auction is outlined below.

5.1 Application Forms

The application forms for participation in the auction can be obtained electronically from the Spectrum Management and Telecommunications website, at http://www.ic.gc.ca/spectrumauctions.

Please note that additional corporate documentation may be required as attachments to the application forms (refer to Appendix B – Checklist of Forms).

A summary of key dates associated with this licensing process is provided on page i and on the Spectrum Management and Telecommunications website at http://www.ic.gc.ca/spectrumauctions. Interested parties are advised to check the website for updates to the schedule of events.

The policies, rules and definitions associated with this licensing process are set out in:

  • this document;
  • Canada Gazette notice DGRB-004-08, Spectrum Utilization Policy and Consultation on a Framework to Auction Spectrum in the Bands 849-851 MHz and 894-896 MHz for Air-Ground Services; and
  • any written amendment or supplement that may be issued by the Department.

5.2 Bidder Qualification

In order to participate in the auction, applicants must be eligible to become a radiocommunication carrier, radiocommunication service provider or radiocommunication user. For additional information, please refer to the eligibility criteria condition of licence defined in Section 3 of Appendix A – Licence Conditions.

Industry Canada will review the application forms (and any associated documents) and the accompanying irrevocable standby letters of credit after the closing date for the submission of applications. In this initial review, the Department will identify any errors in the application forms or the irrevocable standby letters of credit.

Following the initial review period, the Department will provide applicants with an opportunity to correct any errors or inconsistencies in their application or the irrevocable standby letter of credit that have been identified by the Department. The original applications may be returned to the applicant with a brief statement outlining any discrepancy(ies) and/or omission(s), or requesting additional information. The applicant will be invited to resubmit the corrected form and/or the additional information and to physically deliver this to the Spectrum Auctions Manager at the address provided in Section 1.2, by the date specified in the statement.

Applicants who do not comply with this request will have their application to participate in the auction rejected. Applications that are rejected, including those for which an opportunity has been provided to correct errors or inconsistencies identified by the Department, but are still found to be deficient, will be returned to the applicant with a letter indicating that they have been rejected. The letter will outline the deficiencies and will include the applicant's irrevocable standby letter of credit.

Those applicants who have submitted acceptable application materials, including the accompanying financial deposit, will receive a confirmation letter that they are considered a qualified bidder.

Comments received indicated that bidders should be provided with as much information as possible prior to the submission of their sealed bids. The Department will therefore provide the bidders with as much information as possible prior to the submission of sealed bids in order to conduct a fair and transparent process. A list of all qualified bidders and the amount of their financial deposits will be made public via Industry Canada's Spectrum Management and Telecommunications website at http://www.ic.gc.ca/spectrumauctions on the date noted in the Table of Key Dates found on page i.

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5.3 Prohibition of Collusion

Bidders are prohibited from co-operating, collaborating, discussing or negotiating settlement agreements with competitors on licences being auctioned or on the post-auction market structure, from the receipt deadline of applications to participate in the auction until the deadline for the final payment on winning bids.

Prospective bidders will note that the auction application form contains a declaration that the applicant will be required to sign to certify that the applicant has not entered into and will not enter into any agreements or arrangements of any kind with any competitor regarding the amount to be bid, bidding strategies or the particular licence(s) on which the applicant or competitors will or will not bid. For the purposes of this certification, the word competitor means any entity, other than the applicant and/or its affiliates or associated entities, which could potentially be a bidder in this auction based on its qualifications, abilities or experience.

Prospective bidders should note that "affiliate" for the purposes of this licensing process (defined by reference to "control in fact") differs from "affiliate" for the purposes of the Competition Act. As such, in order to avoid contravening Section 47 of the Competition Act, a bidder who enters into such an agreement or arrangement with any one or more of its affiliates may have to make the agreement or arrangement known to the Department at or before the time when any subsequent agreement or arrangement is made.

Collusion, including but not limited to bidding by associated entities, may be determined at anytime. Colluding parties are subject to penalties that may include but are not limited to forfeiture of deposits, auctioned licence payments and licences.

Interested parties are reminded that the provisions of the Competition Act apply independently of, and in addition to, the provisions of the Air-Ground Policy and Licensing Frameworks.

Note that the rules identified above do not govern discussions between bidders and parties who are completely unrelated to the auction.

5.3.1 Communication during the Auction Process

In order to preserve the integrity of the auction process, any communication from an applicant, affiliate, associate or beneficial owner or their representatives that discloses or comments on bidding strategies, including but not limited to the intent of bidding and post-market structures, shall be considered contrary to the Licensing Framework and may result in disqualification and/or forfeiture penalties. This will include communication with or via the media. This prohibition of communication commences from the receipt deadline of applications to participate in the auction until the deadline for the final payment on winning bids.

5.3.2 Beneficial Ownership

Any discussions regarding an addition of beneficial ownership, from the receipt deadline of applications to participate in the auction until the deadline for the final payment on winning bids, involving two bidders or any of their affiliates or associates would fall into the area of prohibited discussions and be considered contrary to the auction rules.

However, an applicant may discuss changes in beneficial ownership with parties who are completely unrelated to other applicants as long as:

  1. any change to the beneficial ownership of the applicant which provides a new party with a beneficial interest or which significantly alters the beneficial ownership structure must be effected prior to five business days before the receipt deadline for the submission of sealed bids; and
  2. the applicant informs Industry Canada immediately, in writing, of any change in beneficial ownership during the auction process.

Industry Canada will publish any updates in beneficial ownership that it receives on the auction website.

5.3.3 Tower Sharing

The prohibition of communication includes discussions about tower and site sharing, with respect to the licences that are the subject of this auction, from the application deadline to the cessation of bidding. Discussions concerning new arrangements or for the expansion of existing sharing arrangements that relate to spectrum outside the air-ground spectrum that is the subject of this auction process are not prohibited.

5.3.4 Communication with Local Exchange Carriers

The prohibition of collusion outlined in Section 5.3 does not include discussions on interconnection with a local exchange carrier (LEC) that is a qualified bidder (or one of its affiliates/associates). This is based on the fact that employees of LECs are prohibited from communicating information about competitors seeking interconnection services to other persons within the LEC. As a result, assuming that the LEC respects these requirements, such communication should in no way affect the integrity of the auction.

5.3.5 Legal and Regulatory Advice

Separate applicants may receive legal and regulatory advice from the same law firm. Such a situation will not be considered to be contrary to the auction rules provided that the law firm complies with the conflict of interest and confidential information requirements of the applicable law society, and that the applicants otherwise comply with the provisions set forth in this document.

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5.4 Participation in the Auction – Affiliates and Associated Entities

All bids must be from unrelated competitors in order to preserve the integrity of competitive bidding. Therefore, only one entity per group of associated entities (which includes affiliated companies) is eligible to participate in the auction. Any discussions or negotiations after the application deadline which create an association with competitors (i.e. any explicit or implicit agreement relating to the acquisition of the licences being auctioned or to the post-auction market structure) during the auction process are prohibited and will be considered to be collusion. Any applicant who has formed part of such an association outside of the Associated Entity will be disqualified from participating in the auction and may be subject to revocation of licences obtained in the air-ground auction. Therefore, all such contact with competitors as is noted above must be suspended from the application deadline until the final deadline for payment on winning bids.

Parties to a consortium agreement disclosed to Industry Canada in accordance with the Associated Entities rule are allowed to modify the terms of such agreement after the application deadline, or to enter into further detailed agreements intended to give effect to a general agreement, as long as the amendments do not involve any new competitors. The amended application will then be subject to approval by Industry Canada.

Bidders must not cooperate, collaborate, discuss or negotiate any agreements with competitors which pertain to policies implemented and licences offered in this auction, between the application date and the deadline for the final payment on winning bids. Once licences have been issued, licensees may transfer licences, subject to departmental approval, to other eligible entities, provided that they meet the conditions of licence.

An agreement to offer sell-buy options or buy-sell options, or to offer another actual or potential bidder access to the applicant's network or to spectrum that it may obtain during the air-ground auction is not prohibited by the rules prohibiting collusion as long as it is fully disclosed to the Department at the time of application. No such agreement is permitted to be made from the time that applications are submitted until after the deadline for final payments on licences won during the auction.

5.4.1 Affiliates

An affiliate is defined as:

A person who controls the entity, or who is controlled by the entity or by any person who controls the entity. "Control" means control in any manner that results in control in fact, whether directly through the ownership of securities or indirectly through a trust, agreement or arrangement, the ownership of a body corporate or otherwise. Control in fact is the ongoing power or ability, whether exercised or not, to determine or decide the strategic decision-making activities of an enterprise, or to manage or run the day-to-day operations of an enterprise.

"Affiliate", defined by reference to control in fact, differs from "affiliate" for the purposes of the Competition Act. Consequently, in order to avoid contravening Section 47 of the Competition Act, a bidder who enters into such an agreement or arrangement with any one or more of its Affiliates may have to make the agreement or arrangement known to the Department at or before the time when any subsequent agreement or arrangement is made.

5.4.2 Associated Entities

An associated entity is defined as:

Any entity who enters into any partnership, joint venture, agreement (including agreements in principle) to merge, consortia or any arrangement, agreement or understanding of any kind, either explicit or implicit, relating to the acquisition of the licences being auctioned or relating to the post-auction market structure, with the applicant. The existence of such agreements, arrangements or understandings must be disclosed in writing to the Department at the time of application and this information will be disclosed to other bidders and to the public. Changes made after the application deadline which create an Association with another applicant are not permitted, and any applicant who has formed such an Association will be disqualified from participating in the auction.

5.4.3 Presumption of Affiliate and Associated Entity Status

If a person owns, directly or indirectly, at least 20% of the entity's voting shares where the entity is a body corporate or, where the entity is not a body corporate, at least 20% of the beneficial ownership in such entity, this will result in a refutable presumption that the person controls the entity. A person may attempt to refute the presumption of an affiliate relationship by submitting an affidavit or declaration, signed by an officer or other appropriate official, which sets out the specific ownership holdings of any person with a 20% or greater holding in the entity, affirms that the person does not control the entity, and sets out the reasons as to why the person does not control the entity. A copy of this affidavit will be made public. Such an affidavit or declaration must also be accompanied by supporting documentation and copies of all arrangements, agreements or understandings between the subject entities. Such materials should be filed as part of the application materials and, in any event, no later than five business days after the publication of the qualified bidders. The Department reserves the right to request further information and to make its own determination regarding this matter.

In those cases where materials have been filed to refute a presumption of affiliate status, Industry Canada will apply a "control in fact" test to determine whether or not the entity has satisfactorily demonstrated that it is not affiliated with the other entity. Such determinations are done on a case-by-case basis. In making its determination, Industry Canada will generally request and review the type of information listed in Attachment D of the Application Form, Declaration of Ownership and Control by Provisional Winners of Spectrum Licences for Air-Ground Services in the Bands 849-851 MHz and 894-896 MHz. The Department reserves the right to request additional information. For example, the Department will require the entity to submit the following types of documentation for itself and any related holding company: the incorporation documents; bylaws; details of shareholdings; shareholder agreements; details related to the election of directors and appointment of officers of the company; complete details on the financial structure of the company; information regarding relationships between the parties; and copies of any agreements or arrangements which could affect whether the company or any related holding company are, or are not, controlled by another entity.

Any entity wishing to demonstrate why it should not be treated as an Associated Entity in the presence of the agreements, arrangements or understandings as outlined in Section 5.3.2 of this document, must, as part of its submission, include evidence and set out the reasons as to why an association does not exist. Such a submission must include a narrative, which will be made public, outlining the arguments as to why an association does not exist. Supporting documentation, as well as copies of all arrangements, agreements or understandings between the subject entities, must also be provided to the Department. The Department reserves the right to request additional information in order to make its determination.

Should the entities fail to provide all relevant information in a timely fashion to allow the Department to complete its determination, or if the Department is not satisfied five business days prior to the date set for the submission of sealed bids that an association does not exist, then only one of those Associated Entities will be permitted to become a qualified bidder in the same service area.

It should be noted that during the Department's review of the materials filed to rebut the presumption of affiliate status, or to dispute the existence of an Associated Entity, the entities will be considered to be competitors and will be subject to the prohibition of collusion rules outlined above.

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