Final Policy and Licensing Procedures for the Auction of the 24 and 38 GHz Frequency Bands

7. Financial Aspects of the Auction

7.1 Reserve Prices

Industry Canada has always operated on the principle that all spectrum users should contribute to covering the cost of spectrum management in Canada. This can be accomplished in an auction context by establishing reserve prices which are conceptually linked to the cost of managing the spectrum in question for the whole term of the licence.

Most respondents to the consultation document agreed with the principle that the department should at least recover its spectrum management costs. There were different opinions on how these costs should be calculated and a number of respondents stated that the department's cost estimates were too high.

The department agrees with many respondents that a better cost estimate can be obtained if, among other things, items such as land mobile spectrum costs are removed from the equation. After making such revisions, the $4700/point figure discussed in the consultation paper drops to a figure of $2500/point. This new figure forms the basis for calculation of the reserve price for each licence and the required pre-auction deposit for each bidder.

Reserve prices are proportional to the bidder eligibility pointsFootnote 37 associated with each licence. Bidder eligibility points are related to the population and bandwidth covered by a licence. As discussed in section 3.2, the department will use Tier 3 service areas. For each spectrum block of 100 MHz, a population of approximately 100,000 corresponds to 1 point. Reserve prices have been established at $2500 per point. The full list of licences and reserve prices is presented in Appendix 6.

The opening bid for each licence will be equal to its reserve price.

7.2 Pre-auction Deposits

The department feels that the integrity of an auction is enhanced by requiring all bidders to submit a pre-auction deposit. Most respondents to the consultation document agreed with this view. The department's suggestion to use the reserve price per point in order to define the amount of the required pre-auction deposit also received general support.

In order to participate in the auction—and as discussed in section 6—bidders are required to select an initial level of eligibility by indicating the number of points for which they wish to be eligible to bid and by submitting the corresponding amount as a pre-auction deposit. The amount of the pre-auction deposits will be determined as the product of the total number of points requested and the reserve price per point. For example, if a prospective bidder indicated that it wished to have an initial eligibility level of 100 bidder eligibility points, it would be required to submit a deposit of $250,000 ($2500*100). This pre-auction deposit must be submitted as an irrevocable standby letter of credit in a form acceptable to the department. Further details on this deposit are contained in the Application to Participate in the Auction of the 24 and 38 GHz Frequency Bands form in Appendix 3.

7.3 Bid Payment

As discussed in section 6.6.1, within ten business days of the auction's close, each provisional licence winner will be required to submit a certified cheque with a value equal to twenty percent of the sum of its standing high bids plus one-hundred percent of the sum of any withdrawal penalties that it has incurred. This payment will be non-refundable. If the provisional licence winner fails to make this initial payment within the specified period, then the provisional licence winner's irrevocable standby letter of credit will be drawn upon. If the value of the provisional licence winner's irrevocable standby letter of credit is less than the required amount, then the provisional licence winner will forfeit its right to have the licence(s) issued to it and the provisional licence winner will be subject to the applicable forfeiture penalties. A certified cheque for the remaining eighty percent of the total of the high bids will be due within thirty business days of the auction's close. If the provisional licence winner fails to make this final payment within the specified period, then the provisional licence winner's irrevocable standby letter of credit will be drawn upon. If the value of the provisional licence winner's irrevocable standby letter of credit is less than the required amount, then the provisional licence winner will forfeit its right to have the licence(s) issued to it and again the provisional licence winner will be subject to the applicable forfeiture penalties.

A provisional licence winner may not selectively forfeit on a subset of the licences on which it placed the high bid. If all required payments are not received, then the provisional licence winner will forfeit its right to have any 24 or 38 GHz licence issued to it.

All payments must be made by certified cheque, payable to the Receiver General for Canada, drawn on a financial institution which is a member of the Canadian Payments Association.

It is important to note that these bid payments for the initial ten-year term are in lieu of any fees fixed under the Radiocommunication Act.Footnote 38

7.4 Bidding Credits

During the consultation process the department received a request to provide bidding credits for small business participants in the auction. Given the large number of small business assistance programs already available, potential means (such as the use of non-equity financing) for large players to use smaller players as "fronts", and the potential for inefficient distortions in the allocation of the spectrum resource, the department has determined that bidding credits should not be adopted for the licensing process for 24 and 38 GHz spectrum.


Footnotes

  1. back to footnote reference 37 See discussion of bidder eligibility points in section 6.5.1 of this document.
  2. back to footnote reference 38 As per subsection 5(1)(1.3) of the Radiocommunication Act.
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