Consultation on Revisions to the Framework for Spectrum Auctions in Canada

April 2009

Contents


1. Introduction

In June 1996, the Radiocommunication Act was amended to give the Minister of Industry the explicit authority to use auctions to select those to whom radio authorizations would be issued. The Framework for Spectrum Auctions in Canada (the Framework), first issued in August 1998 following a public consultation, outlined the general concepts and rules that would normally be applicable for spectrum auctions in Canada. The second edition, released in 2001, contained refinements in auction rules based on the experience gained by conducting auctions and studying other administrations.

In June 2007, Industry Canada released a revised Spectrum Policy Framework for Canada that provides the policy objective and enabling guidelines for managing the radio frequency spectrum in Canada. The revised policy framework states that the Department will rely to a greater extent on market forces yet recognizes the continued need to manage spectrum, as it is a public resource. Section 2 of this paper continues the discussion that began during the 2005 consultation on the renewed spectrum policy framework and seeks comments on the appropriate level of regulation that the Department should use when managing spectrum into the future with respect to the subjects raised in this paper.

Two recently released consultations, Consultation on a Framework to Auction Spectrum in the 2 GHz Range including Advanced Wireless Services and Consultation on the Renewal of 24 and 38 GHz Spectrum Licences and Spectrum Licence Fees for 24, 28 and 38 GHz Bands, indicated that the Department would be launching this consultation to provide clarification on the renewal of long-term licences.

Although comments are being accepted on all aspects of the Framework, input is sought on three areas in particular:

  • the use of auction types other than simultaneous multiple-round ascending;
  • the use of auctions as a means of awarding satellite licences; and
  • the renewal of long-term spectrum licences.

Revisions are also being made to sections 5 and 6 of the 2001 Framework (Auction Process and Auction Design and Rules) by significantly reducing the level of detail provided, noting that the consultation published prior to each auction will provide detailed information on the auction process, design and rules.

In section 6 of this paper, the Department is taking the opportunity to seek comments on two other issues related to long-term spectrum licences: the research and development condition of licence and Tier areas for spectrum licensing.

1.1 Mandate

The Minister of Industry, through the Department of Industry Act, the Radiocommunication Act and the Radiocommunication Regulations, with due regard to the objectives of the Telecommunications Act, is responsible for spectrum management in Canada. As such, the Minister is responsible for developing goals and national policies for spectrum resource use and ensuring effective management of the radio frequency spectrum resource.

1.2 Legislation

The Minister of Industry is provided the general powers for spectrum management in Canada pursuant to section 5 of the Radiocommunication Act and sections 4 and 5 of the Department of Industry Act. The Governor in Council may make regulations with respect to spectrum management pursuant to section 6 of the Radiocommunication Act; these have been prescribed under the Radiocommunication Regulations.

2. Spectrum Management in Canada

Decades ago, at the inception of wireless communications, the practical necessities of managing interference led governments to rely heavily on a command and control method of spectrum management. Times have changed since then and governments have been moving away from a heavy-handed regulatory approach to one that provides more flexibility and a greater reliance on market forces. Industry Canada has also been making this shift. Spectrum licences are issued on a technology-neutral basis to the extent practical in order to allow licensees to adjust their systems to meet their needs. In the mid-1990s, spectrum auctions were introduced; a significant step in the direction of greater reliance on market forces in the assignment of licences. Similarly, the decision to allow the use of secondary markets for licences obtained in an auction licensing process recognized the benefits of allowing for adjustments in the market. Since that time, Industry Canada has continued to migrate toward a spectrum management regime that is less characterized by command and control regulation and is more reliant on market forces to achieve the greatest economic and social benefits from the usage of the spectrum resource.

In March 2006, the Telecommunications Policy Review Panel Final Report recommended "relying as much as possible on market-based approaches to spectrum management" and "moving toward the establishment of market-based exclusive spectrum rights (i.e. the ability to buy, sell and lease spectrum) and the elimination of barriers to the development of secondary markets in spectrum." The Department notes, however, that, along with this trend, there is usually a recognition of the need to continue to manage the spectrum to varying degrees, depending on the situation. For instance, some oversight may be required with respect to ongoing international harmonization, issues relating to national security and in managing interference.

The Department's 2007 Spectrum Policy Framework for Canada includes the following enabling guidelines:

  1. Market forces should be relied upon to the maximum extent feasible.
  2. Notwithstanding (a), spectrum should be made available for a range of services that are in the public interest.
  3. Spectrum should be made available to support Canadian sovereignty, security and public safety needs.
  4. Regulatory measures, where required, should be minimally intrusive, efficient and effective.
  5. Regulation should be open, transparent and reasoned, and developed through public consultation, where appropriate.
  6. Spectrum management practices, including licensing methods, should minimize administrative burden and be responsive to changing technology and marketplace demands.
  7. Canada's spectrum resource interests should be actively advanced and defended internationally.
  8. Spectrum policy and management should support the efficient functioning of markets by:
    • permitting the flexible use of spectrum to the extent possible;
    • harmonizing spectrum use with international allocations and standards, except where Canadian interests warrant a different determination;
    • making spectrum available for use in a timely fashion;
    • facilitating secondary markets for spectrum authorizations;
    • clearly defining the obligations and privileges conveyed in spectrum authorizations;
    • ensuring that appropriate interference protection measures are in place;
    • reallocating spectrum where appropriate, while taking into account the impact on existing services; and
    • applying enforcement that is timely, effective and commensurate with the risks posed by non-compliance.

Comments are sought on the appropriate level of regulation that the Department should use when managing spectrum into the future with respect to the subjects raised in this paper.

3. Auction Types and Attributes

3.1 Types of Auctions

Spectrum is a scarce public resource that is vital to the country's socio-economic well-being. Auctions are an efficient market-based means of assigning spectrum licences, through a fair and transparent process, to those who value them most. Auctions have been used by Industry Canada since 1999 in situations where demand exceeds supply. The use of auctions is compatible with the policy objectives outlined in the Telecommunications Act, such as enhancing competitiveness and fostering an increased reliance on market forces.

To date, simultaneous multiple-round ascending (SMRA) auctions have been the design most often used in Canada to authorize the use of available spectrum by means of an auction. However, Industry Canada continues to monitor the advances in both the theoretical and practical aspects of auction design. The Department anticipates circumstances wherein it would be advantageous to use other types of auctions, including but not limited to sealed-bid and clock auctions. Industry Canada is currently preparing for its first sealed-bid auction for air-ground services in the bands 849-851 MHz and 894-896 MHz.

The SMRA model, which allows the simultaneous offering of many licences, is the most prevalent, internationally used type of spectrum auction. Bidding is held over multiple rounds, with standing high bidders announced at the end of each round. The auction remains open on all licences until no further bids, withdrawals or proactive waivers are submitted. The recent AWS auction used this auction format. From an economic perspective, an auction is deemed to be efficient when those who value the spectrum the most are able to acquire the licences. An SMRA auction may result in an efficient assignment of many licences when licence values are independent. However, when synergies exist between licences, it may be difficult for bidders to assemble the package of licences that best fits their business plan.

In a sealed-bid, first-price auction, participants simultaneously submit a bid for each licence or package of licences in which they are interested. Bidders are not aware of the value of others' bids. The highest bidder wins and pays the price of its bid. First-price auctions introduce some strategic complexity, as each bidder will likely give some consideration to what other participants may be willing to pay. Ideally, a bidder wants to only slightly exceed the second highest bid in order to minimize costs – an approach that can lead bidders who have a higher valued use for the spectrum to strategically bid below their true value. Following this strategy may result in being outbid by a competitor with a lower valued use, and hence the outcome would be inefficient. Sealed-bid auctions are simple, low cost and provide an expeditious process. However, because of the single round design, there is no opportunity for the price discovery process that occurs in some other types of auctions. As a result, bidders may pay vastly different amounts and winning bidders may fall victim to the "winner's curse" wherein a bidder pays a price significantly higher than the second highest bid.

The sealed-bid, second-price auction, also referred to as a Vickrey auction, is like the sealed-bid, first-price auction except that the standing high bidder pays the second highest bid rather than its own. In the case of a single bidder, the standing high bidder would pay a reserve price established by the government. Like the first-price design, there is no opportunity for price discovery in this type of auction. This pricing rule is held to produce more efficient results because a bidder's best strategy is to simply bid the true values of the licence given that the bidder will only have to pay the price of the second highest bid.

In a clock auction, substitutable blocks are offered (e.g. a single band of available spectrum may be broken down and offered in 5 MHz blocks). Qualified bidders then indicate the number of blocks that they would like to purchase at the current price. If demand exceeds supply, the price is raised and bidders again indicate the number of blocks that they want at the new price. This process of price discovery continues until supply is equal to or greater than demand. Bidders may reduce their demand as prices rise.

3.2 Auction Attributes

An auction can be conducted using different approaches: ascending or descending format, anonymous bidding, combinatorial bidding, etc. Industry Canada notes that there are many other available features that may be considered when developing future auction policies.

Generally, in an auction with combinatorial bidding (also referred to as package bidding), bids are placed on groups of licences. Combinations can be preset or user defined. To date, the latter has been used in very few auctions internationally, and only where few licences are available, due largely to the complexity of the process. The use of combinatorial bidding allows bidders to gain licence complements and addresses the issue of stranded bids in an auction without combinatorial capability, where bidders may win some but not all of the licences that they require.

Clock auctions can also include a combinatorial component wherein the standard clock auction format is followed by one final round where each active bidder submits its best and final offer on the combination of licences that they wish to acquire. An algorithm then determines the most efficient assignment of all licences based on the final offers submitted.

In an auction with anonymous bidding, information that may indicate a specific applicant's interests in the auction, including the bidder's identifying qualification information, licence selections and bidding activity, may be withheld from public release until after the auction closes. The U.S. Federal Communications Commission (FCC) recently used anonymous bidding in its 700 MHz auction. The intent behind using anonymous bidding is to reduce the potential for anti-competitive bidding behaviour such as signalling, coordinated bidding and retaliatory bidding, all of which could potentially lead to the inefficient outcome of an auction.

3.3 Selecting the Appropriate Auction Format

As illustrated above, there are many different types of auctions, with many potential design features. Each auction design has its benefits and drawbacks, depending on the situation, e.g. when single or multiple licences are offered, when a single frequency block is offered over multiple areas, when multiple frequency blocks are offered over a single area, or when multiple blocks are offered over multiple areas, etc. The choice of optimal auction format will also depend on the extent to which available licences are seen by bidders as substitutes or complements.

Theoretical analysis and experimentation can lead to conclusions that one auction type may be more likely to generate an efficient outcome than another under a given set of conditions, but other factors are also important. Time and cost implications of different auction types must be taken into account, both from the Department's perspective and bidders'. The complexity of the auction design chosen can affect the resource requirements substantially.

New developments in auction design continue to evolve and are being implemented in other countries. Industry Canada will continue to explore auction formats and attributes, including but not limited to those discussed above. By doing so, the Department will be better equipped to respond to future licensing needs while maintaining the ability to attain efficient outcomes in a fair and transparent manner. The consultation that precedes each auction will include a discussion and invite comments on the Department's proposed auction format.

Comments are sought on the various types of spectrum auctions and auction formats to be used by the Department as well as the circumstances under which a particular format or attribute should or should not be applied.

4. Use of Auctions for Satellite Licensing

To date, competitive licensing for Canadian satellites has been limited to comparative review processes. However, auctions may also be feasible for selecting satellite operators to whom satellite authorizations will be issued for some satellite services, particularly for those fixed and broadcasting satellite services where there is sufficient interest and competition in Canada for the assignment. Conversely, as is the case for auctions generally, it would be inappropriate to assign satellite spectrum using an auction where there is unlikely to be significant competitive interest.

Access to spectrum at orbital positions is governed by processes set out in the International Telecommunication Union's (ITU) Radio Regulations. Those applying for a licence through either an auction or a comparative review process must take into account the uncertainties arising from the ITU regulatory process and the amount of time required to implement a satellite plan. For instance, the ITU requires that a satellite be in operation within seven years of the date of receipt of the initial filing of information for that position. With many countries filing at different times for use of the same spectrum at or near the same orbital positions, it is possible that Canada would only achieve priority for access to spectrum at a given orbital position well into the seven-year period, perhaps leaving less time than required to award the orbital position and for the licensee to then build and launch a satellite. Although Industry Canada could select satellite operators before gaining priority access, there would be no guarantee that Canada and the selected satellite operator would secure access in the end. In an auction, prospective bidders would need to factor this into their determination of the value of the licensing opportunity being offered.

Industry Canada licenses Canadian satellites that are used to provide capacity to service providers and users in Canada and beyond. Canada is also open to the use of foreign satellites, which are licensed by their home countries, for providing capacity in Canada. As the Radiocommunication Act does not apply to these foreign-licensed satellites, no Canadian licence is required for this activity. Prospective bidders in an auction would also need to take into account this non-Canadian competing source of capacity for serving the market in their determination of the value of the licensing opportunity being offered.

Comments are sought on the Department using auctions to select those to whom a satellite authorization will be issued.

5. Licence Renewal

Currently, the Framework provides that a spectrum licence issued via an auction will generally be valid for 10 years from the date of issuance, with a high expectation of renewal for a further 10-year term, unless a breach of licence condition has occurred (including any licence condition on implementation), a fundamental reallocation of spectrum to a new service is required, or an overriding policy need arises.

Generally, at least two years prior to renewal, the Department will ascertain whether there is a need for a fundamental reallocation or whether an overriding policy need has arisen. If either situation exists, the Department will launch a consultation to discuss the proposed changes to be implemented. In the absence of both a fundamental reallocation and an overriding policy need, a consultation paper would instead be launched to discuss and invite comments on licence conditions and fees that would apply during the next licence term. It is proposed that the existing conditions of licence would be used as a baseline and discussions regarding any new conditions or changes to existing conditions being proposed would be included in the paper. Such changes could be required as a result of changes to government policy over the term of the licence; for spectrum management reasons; or if further implementation requirements are being contemplated for the new licence term.

The consultation paper will also include a review and discussion of the general environment in the band, including but not limited to the deployment of services, the availability of equipment and the level of secondary market activity.

With respect to implementation requirements, one of the main issues of interest at renewal is the extent of implementation achieved by licensees. When initially licensing any new service, a condition of licence is generally included requiring that the spectrum be put to use within a specified time frame. This condition is normally put in place to ensure that the spectrum is used and to deter access to the spectrum either for speculation purposes or spectrum warehousing. In the licence renewal process, the Department would review the deployment of services and determine whether a further implementation licence condition is appropriate for the upcoming term.

The Department recognizes the significant investments made by licensees to establish networks and the importance of long-term certainty that the industry requires to provide a stable investment climate. It is therefore proposed that licences continue to have a high expectation of renewal as per the existing Framework, with such renewal being subject to any changes to the terms and conditions of licensing developed through consultation as described above.

5.1 Licence Term

In many countries, spectrum managers are issuing long-term spectrum licences for terms of 10 years and increasingly relying on market forces to determine how and when spectrum is put to use.

In the United Kingdom, Ofcom has introduced indefinite licence terms for its auctioned spectrum but retains the power to revoke licences where overriding reasons of spectrum management require it to do so (e.g. to ensure that the development of a wide swathe of spectrum was not impeded by a minority user; or that spectrum did not remain unused for an excessive period). This power to revoke only applies after the initial licence term and requires five years' notice.

To date in Canada, long-term spectrum licences have been issued with a licence term of 10 years. During that term, the Radiocommunication Act grants the Minister the powers to revoke licences, but only on certain specific groundsFootnote 1 (i.e. with consent, where the Radiocommunication Act, the Radiocommunication Regulations or the terms or conditions of licence have been contravened, or where an authorization was obtained through misrepresentation or for non-payment of fees). This limited power to revoke provides licensees with the certainty that they require in order to invest in their networks with confidence. However, given that Industry Canada's powers to revoke differ from those in other countries and do not include the power to revoke for spectrum management reasons, the determination of whether changes are required to the use (e.g. reallocation) is done prior to renewal the end of the licence term and would be consulted upon in the renewal consultation implemented at the end of the licence term.

As a result, the Department proposes that licence terms remain at 10 years in order to provide ample opportunity for public consultation on any pertinent issues, including the implementation of changes if warranted.

5.2 Conditions of Licence

Spectrum licences are subject to conditions of licence and relevant provisions in the Radiocommunication Act and the Radiocommunication Regulations. For example, the Minister continues to have the power to amend the terms and conditions of spectrum licences both during and at the end of the licence term (paragraph 5(1)(b) of the Radiocommunication Act). The Department will review the conditions of licence that will apply to the next licence term during the specific renewal consultation.

5.3 Licence Fees

For licences assigned through an auction, bid payments are made in lieu of fees for the initial term of the licence. Towards the end of the licence term, a consultation is undertaken when new fees or changes to existing fees are being proposed.

The Department's authority to set spectrum licence fees is pursuant to the powers granted to the Minister of Industry in section 19 of the Department of Industry Act. The Act states that the Department may establish fees following a public consultation. On March 31, 2004, the User Fees Act came into effect with the aim of strengthening the elements of accountability, oversight and transparency in the management of user fee activities. The latter Act formally outlines certain additional requirements for the setting of new and amended fees.

In general, fees established by the Department for spectrum authorizations have as their goal to promote the efficient assignment of resources and earn a fair return for the Canadian public for the privilege of access to spectrum, which is a public resource. In the United Kingdom, Ofcom recognizes that licence fees can be an effective tool to promote deployment, and has included provisions in licences that allow fees to be charged after the end of the minimum term if it feels that it is justified to promote spectrum usage. This would be done on a case-by-case basis, taking into account the circumstances at the time, with sufficient prior notice and a public consultation. Fees would, however, not be charged in the initial term, as Ofcom believes that initially the payment of an auction fee is sufficient to encourage the efficient use of the spectrum.

Industry Canada believes that fees should be imposed for renewed licences and should be based on an estimation of the market value of the spectrum in question. It is challenging to establish the value of spectrum in terms of economic rent due to the high level of dissimilarity that exists among markets. Demographics, timing, relative competitiveness, as well as supply and demand, all have significant impacts on spectrum values. The Department considers many factors when setting fees such as fee treatment in both Canada and other countries. For international fee comparisons, the Department looks at countries that have licensed similar spectrum and, for domestic comparisons, fees established either through an auction process or through an administrative process are reviewed.

Comments are sought on all issues relating to the Department's proposal regarding the renewal process for long-term licences, including:

  • that licences continue to have a high expectation of renewal;
  • that licences continue to be issued for 10-year terms;
  • that the conditions of licence applied to the renewed licences may differ from those on the existing licences, with such changes being made following a consultation; and
  • that fees be imposed for renewed licences and be based on an estimation of the market value of the spectrum.

6. Other Issues

6.1 Research and Development (R&D)

In 1983, Cantel (now Rogers) included a provision in the cellular licence application to allocate 2% of the corporation's gross revenues to R&D with respect to mobile cellular technology and services. When Cantel was selected as the successful applicant, it was held to the commitments set forth in its application and had an R&D obligation included as a condition of licence. In 1991, the Department applied a similar R&D condition of licence to the regional telephone companies' cellular five-year special authorizations. The licence condition was also included in many subsequent licensing processes.

Initially, this condition of licence was established to stimulate R&D in the telecommunications sector. Today, the wireless industry is thriving and is a strong performer in terms of R&D spending, with more than a billion dollars invested since the first licences were issued. Furthermore, it is noted that R&D expenditures are more often undertaken by manufacturers and, as a result, many service providers partner with manufacturers to fulfill their R&D commitments. According to Canada's Top 100 Corporate R&D Spenders 2008,Footnote 2 information technology companiesFootnote 3 accounted for 51% of the top 100 R&D spenders. Companies in the communications/telecommunications equipment grouping led the industry spending and made up 27% of the industry total, while the three companies in telecommunications services represented 13%. Together, the two aforementioned information technology sub-sectors had a weighted average of R&D as a percentage of 2007 revenues of 15.7%. The Department notes that wireless companies generally undertake these R&D activities on an ongoing basis in order to be competitive in the marketplace and many continue to exceed the required level of R&D spending.

The R&D condition of licence requires that licensees submit annual audited R&D statements to the Department. Industry Canada recognizes that generating these reports places additional administrative and financial burdens on licensees. The analysis of these reports to date shows that the largest licensees have, on average, exceeded the 2% requirement identified in their condition of licence.

Industry Canada continues to recognize the need for the government "to stimulate research and development in Canada in the field of telecommunications and to encourage innovation in the provision of telecommunications services."Footnote 4 The Department notes, however, that two recent reports, the Telecommunications Policy Review Panel Final Report and the OECD Telecommunication Regulatory Institutional Structures and Responsibilities,Footnote 5 cautioned against the mix of regulation and industrial development strategy. Other areas of Industry Canada are recognized as being well placed to further this policy objective.

Comments are sought on the continued need for the condition of licence requiring that licensees invest a percentage of their adjusted gross revenues in R&D.

6.2 Tier Areas for Spectrum Licensing

Industry Canada uses geographic area definitions known as service area Tiers for spectrum licensing. These Tiers are based on Statistics Canada census subdivisions as described in the document entitled Service Areas for Competitive Licensing.Footnote 6

Four levels of Tiers have been established and used in past licensing processes: Tier 1 is national; Tier 2 is basically provincial and consists of 14 large service areas; Tier 3 contains 59 smaller regional service areas; and Tier 4 comprises 172 localized service areas. Using these established Tiers helps both the Department and bidders, as opening bids can be set based on known populations. Potential bidders can also readily access demographic data for the areas, which assists them in building business cases.

Typically, Tiers are selected based upon the specifics of the type of service to be offered by the spectrum being auctioned. The consultation released prior to each licensing process seeks comments on the specific Tier or combination of Tiers to be used for that particular process.

Currently, Tier areas include metropolitan areas, along with the surrounding area, resulting in a service area that usually includes both urban and rural areas. The Department has received comments in recent consultations suggesting that a new Tier level be established wherein metropolitan areas would be licenced separately from the surrounding area, resulting in a definition and differentiation between the urban and rural areas. Some believe that this would provide an opportunity to reduce the digital divide in Canada by allowing companies interested in serving only smaller rural areas to bid on licences that do not include urban markets.

In the past, definitions have been established in fixed bands to differentiate between urban and rural areas. The preference of where the lines should be drawn differs depending on the business case. Further reducing the size of the licence areas may facilitate access to spectrum for rural service providers. The Department notes, however, that a move to even smaller licence areas would make frequency coordination more complex at the border of adjacent service areas.

Comments are sought on the establishment of a new Tier level that would differentiate urban and rural areas or whether other mechanisms could achieve the same purpose more effectively.

7. Submitting Comments

Respondents are requested to provide their comments in electronic format (XHTML, WordPerfect, Microsoft Word or Adobe PDF) to the following email address: ic.spectrumoperations-operationsduspectre.ic@canada.ca.

Written submissions should be addressed to the Director, Spectrum Management Operations, Radiocommunications and Broadcasting Regulatory Branch, Industry Canada, 300 Slater Street, Ottawa, Ontario, K1A 0C8.

All submissions should cite the Canada Gazette, Part I, the publication date, the title and notice reference number DGRB-001-09. Parties should submit their comments no later than June 15, 2009, to ensure consideration. Soon after the close of the comment period, all comments received will be posted on Industry Canada's Spectrum Management and Telecommunications Web site at http://www.ic.gc.ca/spectrum.

The Department will also provide interested parties with the opportunity to reply to comments from other parties. Reply comments will be accepted until July 15, 2009.

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