Consultation on a Licensing Framework for Mobile Broadband Services (MBS) — 700 MHz Band
1. Through the release of this paper, Industry Canada is hereby initiating a consultation on a licensing framework for Mobile Broadband Services (MBS) in the band 698-806 MHz (also known as the 700 MHz band) as announced in Canada Gazette notice SMSE-002-12, Policy and Technical Framework: Mobile Broadband Services (MBS) — 700 MHz Band, Broadband Radio Service (BRS) — 2500 MHz Band.Footnote 1
2. Subsequent to the initial consultation entitled SMSE-018-10, Consultation on a Policy and Technical Framework for the 700 MHz Band and Aspects Related to Commercial Mobile Spectrum,Footnote 2 released in November 2010, and the resulting policy decisions recently announced in the document SMSE-002-12,Footnote 3 Industry Canada is now seeking comments on licensing considerations related to auction format, rules and processes, as well as on conditions of licence for spectrum in the 700 MHz band.
3. 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 Canadian telecommunications policy set out in section 7 of the Telecommunications Act, is responsible for spectrum management in Canada. As such, the Minister is responsible for developing national policies for spectrum utilization and ensuring effective management of the radio frequency spectrum resource.
4. In developing a licensing framework for MBS in the 700 MHz band, Industry Canada will be guided by the objectives stated in section 7 of the Telecommunications Act, the policy objective stated in the Spectrum Policy Framework for CanadaFootnote 4 (SPFC) to maximize the economic and social benefits that Canadians derive from the use of the radio frequency spectrum, and the policy objectives outlined in SMSE-002- 12,Footnote 5 as follows:
- sustained competition in the wireless telecommunications services market so that consumers and businesses benefit from competitive pricing and choice in service offerings;
- robust investment and innovation by wireless telecommunications carriers so that Canadians benefit from world-class networks and the latest technologies; and
- availability of these benefits to Canadians across the country, including those in rural areas, in a timely fashion.
6. In SMSE-002-12, Policy and Technical Framework: Mobile Broadband Services (MBS) — 700 MHz Band, Broadband Radio Services (BRS) — 2500 MHz, Industry Canada announced specific policy decisions related to the licensing process for spectrum in the 700 MHz band. Consistent with those decisions, the following provides an overview of the licences to be auctioned:
- licences will be “spectrum licences in respect of the utilization of specified radio frequencies within a defined geographic area,” as defined in subparagraph 5(1)(a)(i.1) of the Radiocommunication Act;
- licences will be auctioned using Tier 2 service areas (14 service areas) for all frequency blocks;
- a total of five blocks of paired spectrum and two blocks of unpaired spectrum will be available in each service area (seven licence blocks);
- a total of 98 licences will be offered;
- a spectrum cap of two paired frequency blocks will apply to all licensees; the unpaired blocks will not be subject to a spectrum cap;
- a spectrum cap of one paired spectrum block from within blocks B, C, C1 and C2 will apply to all large wireless service providers.Footnote 7
8. The following frequency blocks will be available in all 14 service areas for the 700 MHz auction.
|A||698–704 MHz/728–734 MHz||paired||6+6 MHz|
|B||704–710 MHz/734–740 MHz||paired||6+6 MHz|
|C||710–716 MHz/740–746 MHz||paired||6+6 MHz|
|D||716–722 MHz||unpaired||6 MHz|
|E||722–728 MHz||unpaired||6 MHz|
|C1||777–782 MHz/746–751 MHz||paired||5+5 MHz|
|C2||782–787 MHz/751–756 MHz||paired||5+5 MHz|
9. In SMSE-002-12, Industry Canada indicated that Tier 2 service areas will be used to license all frequency blocks for the auction of 700 MHz spectrum licences. It also stated that the issue with respect to the tier boundaries around Lloydminster, Saskatchewan, would be discussed in the 700 and 2500 MHz consultations on licensing issues.
10. The issue surrounding Lloydminster was raised by SaskTel in response to SMSE-005-11, Decisions on a Band Plan for Broadband Radio Service (BRS) and Consultation on a Policy and Technical Framework to License Spectrum in the Band 2500-2690 MHz, where it proposed that tier area boundaries around Lloydminster are worthy of further consideration by Industry Canada.
11. Industry Canada uses service areas, called tiers, for all competitive licensing processes. These areas are based on Statistics Canada’s Census Divisions and Subdivisions. Four tier sizes, as outlined in the document Service Areas for Competitive Licensing, have been established to accommodate various wireless services, applications and frequency bands. The definition of the service areas within these tiers and accompanying maps and data tables are available on Industry Canada’s website.Footnote 9
12. The smallest Tier service areas roll up to fit within the larger tier areas. Some minor deviations from provincial borders exist. These deviations were made around provincial borders to avoid having a service area boundary cut through a population centre, thereby minimizing potential interference problems.
13. For example, a large portion of Lloydminster, which falls in both Saskatchewan and Alberta, has been captured by service area 4-129 Lloydminster (Alberta). Consequently, the majority of the City of Lloydminster is included in service area 4-129 Lloydminster (Alberta) and respectively in the Tier 3 service area 3-44 (Edmonton) and Tier 2 service area 2-12 (Alberta). As the smaller service area 4-129 is part of the Alberta tier, the effect is that the majority of the City of Lloydminster is currently part of the Alberta service area in tiers 2, 3 and 4.
14. Industry Canada considers that the rationale for the deviations around provincial borders continues to be valid and that any changes which would affect the licensing consistency of existing and future licensing processes are not warranted. Therefore, it is proposed that the current boundaries surrounding service area 4-129 (and thus tiers 3-44 and 2-12) continue to apply.
Industry Canada is seeking comments on whether or not the service area boundary for licences in the 700 MHz band should deviate from the provincial boundary around the City of Lloydminster, (Alberta/Saskatchewan).
15. The auction format should be simple, fair and transparent for bidders; one that leads to an efficient assignment of spectrum. In the selection of an auction format and related rules, consideration is given to the characteristics of the spectrum being auctioned, for example, the quantity and size of the blocks, their geographic characteristics and the similarities that may exist among the blocks.
16. Industry Canada used the Simultaneous Multiple Round Ascending (SMRA) auction format in its first auction in 1999 and in four of its six subsequent spectrum auctions.Footnote 10 The SMRA auction format has been used in spectrum auctions in many countries for more than 15 years. Countries that have used this format in recent spectrum auctions include Italy, Germany, Mexico, Spain, the United States, as well as the Special Administrative Region of Hong Kong.
17. In an SMRA auction, all licences are auctioned simultaneously over a series of rounds. In each round, bids are submitted on individual licences at the announced prices. At the end of each round, a standing high bidder is identified for each licence. The standing high bidder is then committed to the licence and cannot withdraw its bid without the possibility of incurring a penalty. The standing high bidder is released from its commitment when outbid by another bidder. When a licence receives at least one bid, the price for the licence increases in the next round. As the prices rise gradually over multiple rounds, bidders gather information about how the other auction participants value the licences. This price discovery helps to reduce a bidder’s uncertainty regarding the value of the licences. Bidders are able to respond to these changes in prices accordingly, shifting their bids to licences that continue to be consistent with their business objectives. Activity rules are in place to compel active bidding and encourage truthful bids throughout the auction, that is, bidding in a straightforward manner that is consistent with how they truly value the licences. The auction ends when a round passes in which no new bids are received on any licences.
18. The SMRA auction format is a well understood, effective approach to assigning spectrum licences and it remains popular to date; however, it does have some weaknesses. The most notable weakness is the exposure risk, that is, the possibility that a bidder will win some but not all of the licences needed for its business case and may be left stranded with licences that cannot be used as effectively. In an SMRA auction format, bidding is for individual licences only, leaving bidders which seek to aggregate blocks of licences that are contiguous and/or across multiple service areas, vulnerable to the exposure risk.
19. In an SMRA auction, in order to mitigate the exposure risk, bidders are able to withdraw their standing high bids, switching to other desired licences or withdrawing from the auction altogether. However, they may be subject to withdrawal penalties, which are in place to discourage bidders from withdrawing their bids frivolously.
20. Advancements in auction theory and design have led to the development of new auction formats and rules. Industry Canada has been examining these new developments in consideration of the auction format and rules for the 700 MHz auction. One of these advancements is the combinatorial clock auction (CCA) format, which is a variation of the SMRA format in that all licences are auctioned at the same time over multiple rounds. Similar to the SMRA format, the CCA format provides a simple bidding process for participants, including a price discovery stage; however, instead of bidding on individual licences, bidders express their demand for a package of licences at the prevailing prices. The use of package bidding eliminates the exposure risk inherent in the SMRA format. Furthermore, unlike the SMRA format, the CCA format does not require the identification of a ‘standing high bidder’ that is held responsible for individual licences at the end of each round, which makes it easier for bidders to move to substitute licences in response to price changes.
21. Industry Canada is proposing to use the CCA format for the 700 MHz auction. Pricing and activity rules will be established to encourage truthful bidding throughout the auction (see Section 4.2.3). Industry Canada is also proposing to limit the degree of information disclosed regarding bidding activity (see Section 4.2.4). Further information on the proposed CCA format and auction rules for the 700 MHz auction can be found in Annex B.
22. CCAs have been used in several countries since 2008, including the United Kingdom, the Netherlands, Denmark, Austria and Switzerland, and are planned for upcoming digital dividend auctions in Australia, Ireland and the United Kingdom.
23. One of the key attributes of the CCA is the use of package bidding wherein for each round, the participant specifies the set of licences that it would like, at the announced prices, creating a single bid for a package. The package bid is treated as an all-or-nothing bid and the package is awarded in its entirety, or not at all. By bidding on a package of licences rather than individual licences, the exposure risk is eliminated given that only the bid for the entire package can be a winning bid, and not the components of that package. This is particularly important given the regional nature of the licences to be auctioned and the potential for complementarities across these regional licences.
24. For the 700 MHz auction, Industry Canada is proposing the use of generic licences as an additional attribute to the CCA format.
25. Generic licences are blocks of spectrum that are similar enough and of comparable value such that they can be offered in a single category, as described in Table 2 below. A category can include a single licence or a group of generic licences for each service area. A category in a given service area is referred to as a product. Bidders will be able to specify the number of licences in each category in each service area (i.e. in each product) that they would like as part of their package. The winning bidders of the generic licences are able to express their preferences for specific frequencies in an assignment stage. By their very nature, categories of generic licences enhance the possibility of substitution. As well, the use of generic licence blocks simplifies the bidding process, as it reduces the possible number of combinations on which bids may be placed.
26. For the upcoming 700 MHz auction, Industry Canada is proposing that the following licences be treated as generic licences in each service area:
- blocks B and C in the Lower 700 MHz band (two paired generic licences);
- blocks D and E in the Lower 700 MHz band (two unpaired generic licences); and
- blocks C1 and C2 in the Upper 700 MHz band (two paired generic licences).
Note: Industry Canada is not proposing to include Block A in the same generic category as blocks B and C in the Lower 700 MHz band. There appear to be significant differences in the availability of technology for Block A at present, relative to blocks B and C, thereby making the current value of Block A not comparable.
27. These generic licence categories were determined based on the anticipated substitutability of the blocks. Considerations included frequency location in the band, block size, technology and interference constraints. Table 2 illustrates the four categories that are proposed for each of the 14 Tier 2 service areas. One of the categories includes a single licence block, whereas the other three categories include generic licences.
28. It is recognized that contiguous spectrum is preferable to non-contiguous spectrum in terms of technological efficiency. Industry Canada is proposing to design the auction so that if a bidder wins the A licence and one of the B and C licences in a service area, then the bidder will automatically be assigned the A and B licences in that service area. This would guarantee contiguity across these two categories in a service area, which is expected to lead to a more efficient use of the spectrum.
30. In the allocation stage, the number of spectrum licences that a bidder wins in each service area is determined. It consists of:
- clock rounds, a series of rounds where bidders submit a bid for a package of licences (some of which may be generic) in response to prices announced by Industry Canada. The clock rounds continue until there is no excess demand for any of the licences. This is the price discovery stage of the auction.
- a supplementary round, a single round where bidders have the opportunity to make additional bids for packages of licences at prices that they set, subject to limits that are based on their clock round bids.
31. The assignment stage is where winning bidders have the opportunity to make additional bids to express their preferences for particular frequency assignments within the generic licences that they have won.
32. The use of the CCA format and, in particular, the use of generic licences, is expected to contribute to a reduction in the length of the auction, in comparison with the length of an SMRA auction. As well, Industry Canada will use activity-based increments in the clock rounds, where bid increments for a product reflect the level of excess demand. This is also expected to shorten the auction duration, as these increments will increase more quickly for products with higher demand.
33. In light of the decisions announced in SMSE-002-12, during all stages of the 700 MHz auction, a spectrum cap of two paired frequency blocks (blocks A, B, C, C1 and C2) will apply to all bidders. Therefore, in each round, no bidder will be able to bid on more than two licences of paired spectrum in each service area.
34. Furthermore, an additional spectrum cap of one paired spectrum block from within blocks B, C, C1 and C2 will apply to all large wireless service providers. Therefore, in each round, no large wireless service provider will be able to bid on more than one of these paired spectrum blocks in each service area.
35. The proposed activity and pricing rules for the 700 MHz auction are designed to encourage straightforward bidding and to promote price discovery throughout the auction. These are described below and further elaborated in Annex B.
36. In previous SMRA auctions, Industry Canada used an eligibility-based activity rule where each licence was assigned a specific number of eligibility points. Bidders were then required to bid actively on a certain number of eligibility points in order to maintain their ability to bid in subsequent rounds. In general, the required level of activity increased through the different stages of the auction, from a minimum of 70% in the first stage to 100% in the final stage. This allowed bidders the flexibility to switch their bids to other licences in response to price changes, thereby mitigating the exposure risk.
37. With the use of an eligibility-based activity rule, a bidder could respond to price increases by bidding on fewer licences, which would result in a decrease of eligibility points in subsequent rounds. As a general rule, eligibility points cannot be increased once they have been reduced. Consequently, a bidder was not able to switch its bid to a package that was larger in terms of eligibility points but relatively less expensive.
38. In the 700 MHz auction, Industry Canada is proposing activity rules in the allocation stage that will afford bidders increased flexibility to bid on their most preferred package while encouraging truthful bidding. The proposed rules will also ensure that bids in the supplementary round are consistent with the preferences expressed in the clock rounds.
Revealed Preference/Eligibility Point Hybrid Activity Rule
39. In the clock rounds, Industry Canada is proposing to use a hybrid activity rule, which includes an eligibility-based activity rule similar to that used in the SMRA, in conjunction with a revealed preference activity rule. A revealed preference activity rule is based on the behaviour of a bidder in the previous rounds.
40. To begin, the required level of activity in every clock round will be 100% given that bidders in a CCA are not faced with an exposure risk. Therefore, in every clock round, bidders will be required to bid on 100% of their eligibility if they wish to maintain the same level of eligibility in subsequent rounds. When a bidder reduces its bid to a smaller package, then its eligibility for the next round will be reduced accordingly.
41. In addition, a revealed preference rule is proposed, which will allow bidders to exceed their eligibility points in order to bid on packages that have become comparatively less expensive. This will afford bidders greater flexibility to fully express their preferences in the clock rounds of the auction, ensuring that the activity rules do not prevent a bidder from bidding on its most preferred package. Further information on the proposed activity rules in the clock rounds can be found in Annex B, Section 8. As well, a detailed example of the proposed revealed preference activity rule is included in Annex C and an algebraic description of the revealed preference rule is included in Annex D.
Revealed Preference Limit
42. In the supplementary round, Industry Canada is proposing to limit bids based on revealed preference with respect to the bids that a bidder submitted in the clock rounds. The rule, referred to as the "revealed preference limit," encourages truthful bidding throughout the auction, not just in its latter stages. Further information on the proposed revealed preference limit in the supplementary round can be found in Annex B, Section 10.
43. Bid withdrawals were permitted in the SMRA auction format to mitigate the exposure risk inherent in the auction design. Withdrawals are not necessary in the CCA format because bidding is for a package of licences and bidders no longer risk acquiring only some of the licences that they require.
44. All valid bids submitted in the clock rounds and the supplementary round are binding bids and are included in determining the winning packages and base prices after the end of the supplementary round. No bids can be withdrawn.
45. In the CCA format, final prices are determined at either the end of the allocation stage, or where generic licences are concerned, at the end of the assignment stage. Base prices are calculated at the end of the allocation stage following the supplementary round, taking into consideration all valid bids from the clock rounds and supplementary round. Assignment prices are determined at the end of the assignment stage, where bidders that have won generic licences in the allocation stage bid for specific assignments. The assignment prices are incremental to the base prices.
46. Two common pricing rule options to calculate the prices to be paid by winning bidders are a first-price rule and a second- price rule. A first-price rule requires winning bidders to pay the full amount of their winning bid. Conversely, a second- price rule requires each winning bidder to pay an amount that is sufficient to ensure that no other bidder, or group of bidders, was prepared to pay more than the winning bidder for the licence(s) in question.
47. Under a first-price rule, the bidder has a strong incentive to bid less than its true value, which can lead to inefficient outcomes. A second-price rule promotes a more efficient outcome by increasing the incentive for bidders to bid their true value. Bidders, knowing that they will only be required to pay the minimum amount necessary to win their package, will have the incentive to bid truthfully during the entire auction.
48. Industry Canada is proposing to use a second-price rule to determine the base price to be paid by winning bidders for packages won at the end of the allocation stage, and for the incremental prices to be paid for specific licences at the end of the assignment stage.
49. There are several approaches to determine second prices within a CCA. Industry Canada proposes to apply bidder-optimal core prices and to use the “nearest Vickrey” approach, which is one of most common approaches used for CCAs. Further information on the proposed pricing rules is provided in Annex E.
50. In previous SMRA auctions, Industry Canada made all information regarding the bidding activity of all bidders available after each round. Although this transparency facilitated price discovery, it also increased the potential for anti-competitive opportunities. For the 700 MHz auction, Industry Canada proposes to use anonymous bidding, revealing to each bidder their own bid information from the previous round and their eligibility for the next round. All bidders will be informed of the aggregate demand for each product from the previous round and the price of each product for the next round. At the end of each round, information on the latter would also be made available on Industry Canada’s website.
51. With the use of anonymous bidding, enough information will still be provided to permit price discovery, allowing bidders to make an informed decision regarding their bidding strategy. This means that bidders can focus their efforts on the relationship between their valuation of the licences, pricing and demand information provided rather than on the bidding behaviour of individual competitors. Thus, the potential for anti-competitive behaviour is minimized and the bidding process is simplified.
52. At the end of the allocation stage, bidders will be informed of their own winning packages along with the base price to be paid for their winning package. All bidders will be informed of the number of winning bidders and the total number of licences allocated.
53. Following the end of the assignment stage, participating bidders will be notified of the specific licences that they have won and the assignment prices(s) to be paid. Winning bidders will also be informed of the final prices to be paid, namely the sum of the base price and the assignment price.
54. Industry Canada is proposing to make the following information publicly available following the conclusion of the auction:
- the list of winning bidders, licences won and prices to be paid;
- the bids submitted by each bidder in every clock round, including their identity;
- the supplementary bids submitted by each bidder, including their identity; and
- the assignment bids submitted by each bidder, including their identity.
55. Full disclosure of all bidding information at the end of the auction would allow all interested parties to verify the results of the auction, facilitating greater transparency of the auction results. This may discourage bidders from expressing their true value if they believe such information to be commercially sensitive. However, the proposed activity rule in the supplementary round, namely the revealed preference limit, should reduce this concern. Furthermore, Industry Canada considers that full transparency of the results is important to the public interest.
56. Consistent with past practice, the identity of applicants and qualified bidders would be made available to the public prior to the auction, so that all bidders have knowledge of the identity of the other bidders.
57. The proposed CCA format has many advantages. The exposure risk is eliminated, anti-competitive behaviour is reduced, substitution among similar licences is enhanced and the auction duration will likely be reduced. The proposed activity rules, which combine both eligibility points and revealed preferences, will provide flexibility for bidders to select their preferred packages as prices change.
58. In order to assist potential bidders in gaining a greater understanding of the proposed auction format and rules, Industry Canada will hold an information session on May 30, 2012. The session will provide an overview of the proposed auction format and rules for the 700 MHz auction.
59. Further details on the logistics and agenda for the information session are available at: http://www.ic.gc.ca/eic/site/smt- gst.nsf/eng/sf10373.html.
Industry Canada is seeking comments on its proposal to use the CCA format, as well as the general attributes outlined above, including:
- the categories of generic licences;
- the guarantee of contiguity across blocks A and B in the lower 700 MHz band in a specific service area;
- the combined eligibility point and revealed preference activity rule in the clock rounds, and the revealed preference limit in the supplementary round;
- the use of a second-price rule; and
- the information to be disclosed during, and post-auction.
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