As discussed above in Section 2, licences must be clearly and precisely defined before they can be auctioned. As such, the appropriate authorization instrument in an auction context will be the spectrum licence, defined in sub-paragraph 5(1)(a)(i.1) of the Radiocommunication Act as an authorization "in respect of the utilization of specified radio frequencies within a defined geographic area".
It is important to note that the block licensing approach inherent in the use of a spectrum licence (as opposed to apparatus-based radio licences) has recently been proposed and/or implemented for several new servicesFootnote 20 with strong support from industry. Respondents in public consultation processes associated with these services generally agreed that:
- spectrum blocks should be made available to users on a self-managed basis to permit the rapid deployment of communication facilities;
- the technical and operational constraints on the use of spectrum blocks should be minimal, allowing flexibility to the licensee to meet particular service demands in the most efficient and economic manner; and
- assignment of the blocks of spectrum should be over a given service area(s) and not subject to site-by-site authorization.
Given this block licensing approach in an auction context, the question then becomes one of how the total bandwidth and geographic area available for licensing should be divided. Depending on the types of services that may be envisaged for any particular spectrum allocation, the answer will vary. The public consultation phase that the Department will hold prior to each auction will provide key input to the process of determining the bandwidth and geographic parameters of licences to be auctioned. Some general observations on factors pertinent to the determination of spectrum licence parameters are presented below, along with a proposal for a conceptual approach to service area definition.
The objective in defining the geographic and bandwidth parameters of spectrum licences to be auctioned should be to structure these licences in a manner that will:
- allow licensees to most effectively and efficiently establish their market areas and provide their services;
- promote vigorous competition for the benefit of Canadian consumers; and
- ensure a fair and well-run auction.
The appropriate size of spectrum blocks will largely be a function of the (potentially diverse) types of services that bidders plan to provide and the technical characteristics of the equipment used to provide them.
As for the definition of service areas, one initial principle should be respected: full coverage. The principle of full coverage requires that the entire area available for licensingFootnote 21 be covered by contiguous service areas. If undefined gaps exist between defined service areas, there can be difficulties later when trying to assign licences for areas within those undefined gaps.
Consider the case then, of an allocation of 100 MHz across all of Canada being made available for licensing. In terms of bandwidth, should the 100 MHz be assigned as one licence in each service area, or should it be divided into two 50 MHz blocks, or twenty 5 MHz blocks? In terms of geography, should there be national licences put up for auction? Should there instead be blocks made available on a regional or province-byprovince basis, or maybe over a large number of localized service areas?
Smaller and more numerous service areas and/or spectrum blocks permit bidders more flexibility in determining the size of their total spectrum assignment and allow more small players to participate in an auction. However, the complexity of an auction increases when the partition is too fine and the number of licences being bid upon is very large.Footnote 22 It may in fact be optimal to provide a mix of smaller and larger licences in the same auction. Following the example above, five regional or province-wide licences of 10 MHz each and ten 5 MHz licences over a large number of localized areas could be auctioned simultaneously.
Another factor to consider is that service areas which coincide with some sort of widely recognized geographic definitions, such as political boundaries or census areas, are desirable in that they are easily understood and identified and also generally have "off the shelf" statistical and demographic data available which would likely be of significant value to prospective service providers.
The Department proposes that a set of service areas based on Statistics Canada’s 326 Census Divisions be created, with the expectation that these service areas would be used for most, if not all, future spectrum auctions. The Census Divisions provide contiguous coverage of the entire geography of Canada and are linked to extensive Statistics Canada databases.
The suggested approach is similar to the "building block" methodology used by the FCC in the United States, wherein some licensing is done on the basis of Rand McNally’s 493 Basic Trading Areas (BTAs), some licensing is done on the basis of Rand McNally’s 51 Major Trading Areas (MTAs) - each of which is composed of a number of BTAs, some licensing is done on the basis of five regions - each of which is composed of a number of MTAs, and some licensing is done on a national basis - the nation being composed of the five regions.
The smallest service area that would be auctioned would likely be an individual Census DivisionFootnote 23 and the largest would of course be the entire country. Between these two limits, one or more tiers would be created. Census Divisions could be combined into a second tier of larger service areas and these larger areas in turn might be combined into even larger regional areas. For each auction, a decision would be made after public consultation as to which scale(s) of service areas would be appropriate; in some cases it may be optimal to offer a mix of licences over, say, "Tier 1" and "Tier 2" service areas.Footnote 24
One possible concern with such an approach is that some parties might wish to provide service to only one town or localized area that falls within one of the very large Census Divisions in, say, Northern Ontario. Not wishing to or not being able to provide service to an expansive service area, that party might be unable to effectively participate in an auction in which Census Divisions are the smallest lot up for bidding. The Department believes that there are a number of viable options for such parties to be able to acquire the right to serve the smaller areas they desire. First, as outlined below in Section 6 of this document, the Department proposes that auction winners would be able to come to various sorts of mutually beneficial commercial arrangements with parties who wish to serve small and remote communities that might not be part of the auction winner’s planned service coverage. Second, there may be opportunities for a number of parties wishing to serve various individual communities within a Census Division to form a bidding consortium and enter the auction with the hope of winning a licence and then having each consortium member provide service to a portion of the Census Division. Finally, there may be instances where the amount of spectrum available and the number of interested parties is such that the supply of licences in some Census Divisions exceeds the demand; in such cases a party wishing to serve only one portion of a Census Division would be able to acquire a licence for the entire Census Division for only the modest reserve price that would be established prior to the auction and could then serve the particular portions of the Census Division as desired.
If the proposal to use Census Divisions (and/or perhaps Census Subdivisions in some parts of the country) as a building block for a number of tiers of service areas is adopted, the obvious next steps are to determine how many tiers between Census Divisions and national licences there should be and how Census Divisions should be aggregated to form the larger areas that will make up these tiers. The Department is currently doing exploratory work on this issue and looks forward to receiving comments and input via this consultation process.
It is worth reiterating that the first objective is to develop a set of standardized service areas in a number of differently sized tiers. Once developed, public consultation would be held prior to each auction as to which tier(s) should be used for the particular spectrum in question.
A final issue that must be addressed with regard to spectrum licences is the specification of geographic border and band-edge conditions. Under the traditional approach of licensing radio apparatus, equipment standards or limits were prescribed in order to minimize the potential for interference to other spectrum users in adjacent spectrum bands and/or geographic areas. Under the new approach of spectrum licensing, spectrum users would be given increased flexibility in the way in which they implement their systems within their licensed spectrum blocks and service areas. There must, however, be a means of protecting other spectrum users from harmful interference. In a spectrum licensing context this means that some type of condition or limit must be set at the band-edge of a user’s spectrum block and at the geographic border of a user’s service area.
These limits would serve to give practical definition to a user’s spectrum "right" and would form the basis upon which decisions would be made by the Department in the event of complaints of harmful interference. Where neighbouring spectrum users can agree to mutually beneficial deviations from specified border and/or band-edge conditions without causing harmful interference to any third party, they would be free to do so.
As one example of how this issue can be addressed, the American FCC proposes to establish a maximum field strength limit at the boundary of service areas. These field strength limits would precisely define each licensee's rights at their service area boundaries, as well as provide licensees with greater freedom to manage their systems and spectrum, without unnecessary and burdensome coordination.
Similarly, the Australian Spectrum Management Agency (SMA) proposes an interference management framework for spectrum licensees that consists of conditions of licence relating to the operation of transmitters, and of the responsibilities for interference settlements. Some of the elements of the Australian framework include the core conditions that set emission limits outside the service area and outside the band and the determination of unacceptable levels of interference.
The Department notes the approaches of AmericanFootnote 25 and AustralianFootnote 26 spectrum managers and requests comments on these or any other approaches to answering the question of how baseline border and band-edge conditions should be defined in Canada.
Under Industry Canada’s traditional licensing approach, one-year station licences are issued, although for certain services such as cellular telephony or personal communications services (PCS), five-year terms have effectively been granted. Most authorizations, however, have had an implied, although non-guaranteed, longer tenure as it is only in relatively rare cases that licences are not renewed.
In exchange for the market-based payment that auctions will generate, licensees will expect that their licence terms be sufficiently long to ensure that they can make a sufficient return on their investment. This message was clearly articulated in the submissions received during the public consultation period following the Department’s release of the document Review of the Comparative Selection and Radio Licensing Process: Findings in February 1996. The Department agrees that the move to an auction framework will require changes with respect to licence terms.
There are two main considerations which must be balanced in determining the appropriate term of a licence. Longer terms provide the certainty licensees desire when making investment decisions, but make it more difficult to reallocate spectrum quickly to new uses as wireless technology evolves. Shorter terms, combined with uncertain licence renewal procedures, discourage the licensee from making the large fixed investments needed to exploit the technology to its best advantage, but make reallocation easier.
The optimal licence term depends on balancing these considerations, taking into account their relative importance. Mitigating measures and related policies must also be considered in assessing this balance. For example, the possibility that long licence terms might slow the introduction of new technologies can be mitigated by increasing the licensee’s discretion in how to use its spectrum and by making licences transferable. (See discussion on flexible spectrum use and licence transferability in Section 6 of this document.) Similarly, the problem of dampened investment incentives caused by short licence terms with uncertain renewal fees can be mitigated by such simple measures as specifying renewal fees in advance on a basis that does not depend on the licensee’s revenues or profits.
This issue has also been addressed by spectrum managers in a number of other countries. Australia has proposed amending legislation to extend the maximum term of a spectrum licence from ten years to fifteen years.Footnote 27 In New Zealand, legislation currently permits licence terms of up to twenty years, but it is expected that this limit may be increased to a quasi-perpetual term.Footnote 28 In the United Kingdom, the government has noted the need for greater security of tenure when licences are assigned and licence fees determined through market mechanisms, but has not yet specified any particular number of years as being appropriate.Footnote 29 The FCC in the United States has auctioned licences with ten year terms, but these licences also feature a "significant expectancy of renewal" which means that the licence retains a quasi-perpetual nature provided that the licensee does not breach any licence conditions or in some other way deal inappropriately with the FCC.
Noting the views expressed in public consultations and the decisions taken by other administrations, and given the significant up-front fixed investments required by most wireless services, licence terms in the range of ten to twenty years would appear to be appropriate. Comments and supporting rationale are sought on this proposed range and on the specific term (ten years? fifteen years? twenty years?) that would be appropriate.
Furthermore, to ensure that licensees have a continuing interest in maintaining and improving their technical infrastructure, it may be advisable that licensees who have not breached any of the terms or conditions of their licences would have their licences renewed for successive terms unless a fundamental change in spectrum allocation is required. Under such a scenario, incumbent licensees would be notified of their renewal status no later than, say, three years before the end of their current licence term.
Alternatively, licences could be re-auctioned prior (e.g. three years) to the end of each licence term. While this would create more uncertainty for incumbent licensees than the renewal approach described above, re-auctioning would still provide incumbents -who would presumably have a significant advantage in the "re-auction" due to their established infrastructure and client base - with advance knowledge of whether or not they would be receiving a successive licence term. One downside to this approach is the potential "hold-up" problem it creates: an initial licensee could be targeted by an investor who hopes to win the spectrum licence and then acquire the incumbent licensee’s equipment at a "fire-sale" price. Another downside to this approach is the potential it provides for parties to bid solely with the purpose of breaking up an incumbent’s licence aggregation. For example, an economically efficient assignment of spectrum might see one licensee acquire a block of spectrum in each market area in, say, Atlantic Canada. A competitor may seek to damage this licensee by bidding very highly in a "re-auction" for just one key licence, say Halifax, and thus significantly disrupting the business operations of the incumbent licensee.
Comment is sought on the issue of licence renewal versus re-auctioning.
To prevent a licensee from warehousing spectrum for the purpose of pre-empting the entry of other service providers, many spectrum authorities in other countries impose service roll-out requirements as a condition of licence. Service roll-out requirements generally stipulate that a licensee provide service to a certain percentage of the population in its licence area within a specified time frame. Roll-out requirements may not be necessary if the market for the services authorized by a licence is relatively competitive. In this situation, it is in the economic interest of the licensee to provide service earnestly or to transfer the licence to another party. Therefore, roll-out requirements might be unnecessary and may only impose burdensome constraints on licensees and an additional administrative workload on the Department.
Industry Canada solicits comment as to under what circumstances, if any, it should impose roll-out requirements as a condition of licence. Furthermore, in those cases where service roll-out requirements may be deemed necessary, Industry Canada solicits comments on the type of conditions roll-out requirements should entail.
As noted in Section 1, a key benefit to using auctions is that they allow market forces to determine who will gain access to spectrum as well as the uses to which spectrum will be put. To ensure that licensees can quickly and efficiently adapt their service offerings to changing consumer demands, the Department would propose to provide licensees with the maximum possible flexibility in determining the services they will provide.
It should be noted again, however, that certain licence conditions may be required to ensure effective competition or to further social policy objectives. All licence conditions will be clearly specified prior to the auction and after public consultation has taken place.
One policy measure designed to facilitate the adaptation of spectrum use to changing market-place conditions is to make licences transferable. Even if an auction works perfectly in generating an efficient initial assignment of licences, circumstances can change over time so that firms and consumers would benefit from provisions that allow licences to migrate to other users with new and more innovative service offerings or more efficient technologies. By allowing licences to be bought and sold after an auction, a firm with a more valuable new use of the spectrum can negotiate a transfer with the incumbent licensee that is beneficial not only to both parties, but also to consumers.
A number of other administrations, such as Australia, New Zealand, the United Kingdom, and the United States, have either proposed or implemented policies designed to facilitate the workings of a secondary market in spectrum licences.
The Department believes there is merit to making licences transferable with a minimum of regulatory oversight and administrative work and notes a significant level of support for the general concept of licence transferability expressed during previous public consultations. The Department is of the opinion, though, that an absolutely unfettered secondary market in spectrum licences might not be consistent with sound spectrum management.
The Department suggests that the following elements would be necessary in a transferable spectrum licence regime:
- All eligibility criteria, licence conditions, and payment obligations that apply to a m licence would continue to apply should the licence be transferred.
- Should an auction winner transfer its licence to another party, say, nine years into a fifteen year licence term, the second party would only receive a licence term of six years, but would be eligible for the same licence renewal provisions as the original licensee.
- All proposed licence transfers must comply with any spectrum caps or other measures intended to preclude anti-competitive behaviour that may be in place.Footnote 30
- Written notification would be required of all proposed licence transfers. The Department could also request attestations or other documentation to ensure that the points above have been satisfactorily addressed.
- The Department would maintain a publicly accessible database listing all spectrum licences and the respective licensee and would update the database upon approval of a licence transfer.
The Department proposes that licensees be permitted to transfer their licences not only in whole, but also in part; that is to say, licences should be divisible in both the bandwidth and geographic dimensions. This policy will serve many functions. First, it will encourage competition by removing potential entry barriers to certain competitors such as small businesses that may not have been successful in a past auction; second, it will encourage more efficient spectrum use by permitting the deployment of a broader mix of service offerings; and third, it will speed service to unserved or underserved areas.
In addition to the necessary elements for a transferable licence regime listed in the preceding section, there are several other issues that must be addressed with respect to licence divisibility.
When spectrum licences are divisible, should a minimum allowable geographic area or a minimum spectrum block size be defined? The specification of some limit below which a licence cannot be sub-divided can be beneficial in terms of interference management and administration and record keeping. On the other hand, the flexibility of spectrum users is constrained when limits are imposed. The Department does not have a suggested or preferred approach at this time, but notes some options that have been put forth by the governments of AustraliaFootnote 31 and the United StatesFootnote 32 below.
In Australia, a minimum spectrum block size is specified for each of several different spectrum bands. Licensees are not permitted to disaggregate and transfer their spectrum in sizes smaller than these specified limits. In the 500 MHz band, for example, spectrum blocks cannot be smaller than 12.5 kHz.
In the United States it has been proposed that licensees be permitted to divide their spectrum blocks into any number of smaller spectrum blocks of any size. However, the same out-of-band emission protection conditions specified for the original licence would apply to the block sub-divisions unless an alternate arrangement is reached among affected parties.
In the Australian model, the minimum level to which a licence can be sub-divided and transferred is the Spectrum Trading Unit (STUU). The entire geography of Australia is covered by a grid pattern of STUUs, defined in terms of so many degrees, minutes, or seconds of latitude and longitude.
In the United States, it has been proposed that licensees could sub-divide their licences into any geographic partition they desire, but would have to provide detailed definitions, in terms of latitude and longitude, of the partitioned areas to the FCC.
As discussed in Section 7.1 below, the Department proposes that auction winners would not be required to submit their winning bids in the form of lump-sum payments; rather, the bid payment would be spread out over the term of the licence. The concept of licence divisibility raises the issue of how the future licence payments should be divided between the transacting parties. In keeping with the principle of minimum regulatory requirements, it might at first seem best if this matter be left entirely to the parties negotiating a division agreement. However, this creates a problem of opportunism where two parties can carve out a small portion of a licence region, and ascribe the vast proportion of the payment to the party serving this region. If this party later defaults, the other party will basically have the right to the original licence area for a nominal payment. To avoid this possibility, there have to be some guidelines and conditions governing the distribution of the annual payment between parties negotiating the division of a licence.
Industry Canada welcomes comments on the problem of apportioning the annual licence payment between parties when a licence is either geographically partitioned or its bandwidth is divided. In order to foster discussion, Industry Canada mentions the following proposals which are being considered by other spectrum management administrations.
In the case where a spectrum licence is geographically partitioned, the annual payment can be apportioned to each party based upon the ratio of the population of the partitioned area to the population of the entire original licensed area. In accordance with this policy, a default on an obligation will only affect that portion of the service area held by the defaulting party. This means that if the partitioner is unable or unwilling to make its annual payment, its spectrum rights are suspended but the partitionee’s licence is not affected.
In the case where a spectrum block is divided in the bandwidth dimension, the parties entering into the commercial agreement can pay annual payments based upon the ratio of the amount of spectrum disaggregated to the amount of spectrum licensed. For example, if a 30 MHz spectrum block is disaggregated into two 15 MHz spectrum blocks, each party receiving one 15 MHz block would pay one-half of the annual payment.
In the event that a licence is geographically partitioned or disaggregated, Industry Canada wishes to ensure that any service roll-out requirements that may be specified in the terms and conditions of licence will continue to be met. In addition to this objective, Industry Canada also wishes to give the licensee maximum flexibility in organizing a commercial agreement with another party.
In keeping with these twin objectives, Industry Canada puts forward the following suggestions. Comments are invited on these specific ideas and any suggestions of other possibilities are welcomed.
When a spectrum block is divided geographically, one of two possible options can be followed. In the first option, the party acquiring spectrum through the division of an existing licence (divisee) will be required to satisfy the same service roll-out requirements as the initial licensee (divisor) in its licence area. The second option is applicable in the case that an initial licensee who, at the time of partitioning, has met its service roll-out requirements and certifies that it will continue to do so to the end of the licence term. In this instance, minimal or no service roll-out requirements will be imposed on the divisee.
When a spectrum block is divided along the bandwidth dimension, the initial licensee may elect to retain responsibility for meeting the service roll-out requirement or it may negotiate a transfer of this obligation to the divisee. Alternatively, both parties in the commercial arrangement may agree to share the responsibilities. In the instance where both parties share a responsibility in meeting the service roll-out requirements and one or both parties fail to meet their obligations, both parties’ licences are subject to forfeiture.
In the case where a commercial arrangement between two parties involves both geographic partitioning and a division of bandwidth, Industry Canada proposes that the rules regarding geographic partitioning predominate.