Licensing Framework for Mobile Broadband Services (MBS) — 700 MHz Band (sf10573)

4. Auction Format and Rules

22. As stated in the FSAC, Industry Canada’s objective is to select an auction design that is optimal for the spectrum being offered and the circumstances that exist at the time. In most of its past auctions, Industry Canada has used a simultaneous multiple round ascending (SMRA) auction format. Advances in auction theory and design have led to the development of new auction formats and rules. One of these new auction formats 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.

4.1 Auction Format

23. Industry Canada sought comments on its proposal to use the CCA format for the 700 MHz auction.

Summary of Comments

24. Bell, Public Mobile, Rogers, TELUS and WIND noted the overall advantages of the CCA format and supported its use for the 700 MHz auction.

25. Regional operators (Eastlink, MTS Allstream, Quebecor, SaskTel, Shaw, Sogetel, SSi, Tbaytel and Xplornet) expressed concerns that the proposed auction format and rules favour national bidders. In particular, they argued that a national bid may be able to trump the bids of regional bidders. Eastlink, SaskTel and Sogetel suggested the use of the SMRA format.

26. Some respondents expressed concerns about the overall complexity of the proposed auction format (Mobilicity, SaskTel, Sogetel, Tbaytel, TELUS and Xplornet), including bidding in the auction (Xplornet and Tbaytel) and winner and price determination (Eastlink).

27. To address their concerns about the format, some respondents suggested that bidding in the supplementary round be restricted to: packages bid on in the clock rounds (Quebecor); packages that include at least the bidder’s final clock package (Quebecor); unallocated licences (MTS Allstream and Mobilicity); or to bidders that have a final clock package (Quebecor). Bell disagreed with the suggestions to restrict supplementary round bidding to only packages that include a bidder’s final clock package. Rogers and TELUS submitted that they do not support Quebecor’s proposals, whereas Public Mobile stated that it supports the intentions of Quebecor’s proposals, but that the solutions proposed by Quebecor create several problems.

28. SaskTel proposed that the winning combination of packages "satisfy a constraint that every bidder has to win a package that includes at least its final clock package." Bell and TELUS did not support this recommendation.

29. Some respondents suggested that the supplementary round be eliminated entirely (SaskTel, Shaw and SSi) or if all licences are allocated in the final clock round (Eastlink, MTS Allstream and SaskTel). SSi also suggested that if there are unallocated licences after the clock rounds, those licences should be subject to a new auction. Bell, Rogers, Public Mobile and TELUS submitted that they do not support the suggestion to omit the supplementary round.

30. Rogers proposed that bidders not be allowed to place bids for packages that include upper block licences at the same time as the lower A block, or for packages that include both the A and D/E blocks without also including a bid in the B/C blocks. In their reply comments, Quebecor and Xplornet supported Rogers’ proposal, whereas Bell, MTS Allstream, TELUS and WIND did not, arguing that it would reduce bidding flexibility. Bell, however, recommended that Industry Canada not allow bidders to place bids on packages which contain both lower and upper "prime" spectrum in the same licence area.

Discussion

31. The CCA format was proposed for the 700 MHz auction, as it utilizes package bids, eliminating the risk that bidders win some but not all of the licences needed for their business case, known as exposure risk. This auction format reduces complexity for bidders in that they can bid on the entire packages of licences that they want on an all-or-nothing basis rather than trying to put together a package comprised of individual licences. The format makes it easier for bidders to move to substitute licences in response to price changes given that, unlike the SMRA auction format, it does not require the identification of a ‘standing high bidder’ that is held responsible for individual licences at the end of each round. Furthermore, the format reduces opportunities for anti-competitive behaviour during the auction.

32. Return to the SMRA auction format: The SMRA auction format is familiar to and well understood by stakeholders, as it has been used in five of seven spectrum auctions in Canada. However, in an SMRA auction, a bidder seeking multiple licences could be subject to exposure risk (refer to Annex A). This could lead to complicated bidding strategies, particularly for a bidder with a large package of licences, and potentially result in a less efficient outcome. The restricted bidding flexibility resulting from the spectrum aggregation limits could increase this complexity.

33. Package bidding is particularly important for the 700 MHz band, where two distinct ecosystems have developed in the United States, namely the AT&T ecosystem (blocks B and C) and the Verizon ecosystem (blocks C1 and C2). Equipment from one ecosystem cannot be used in the other. As such, if bidding were for individual licences, as in an SMRA auction, there would be a risk that a bidder interested in either blocks B/C or blocks C1/C2, but not both could get stranded with some licences for one ecosystem and some licences for the other ecosystem. The regional nature of the licences also increases the exposure problem for bidders seeking licences across multiple service areas.

34. Concerns of regional respondents: Spectrum aggregation limits have been implemented in order to facilitate at least four bidders obtaining spectrum in each service area. Based on the current mix of licensees in Canada, this will provide opportunities to both regional and national carriers in each service area. The objective of the auction is an efficient assignment of licences, where licences are assigned to those who value them the most and thus are most likely to deploy them and offer services. The CCA format is effective in this regard, as it permits bidders to submit bids up to their valuation, with full confidence that they will not be stranded with only some of the licences that they need. Winning bids are determined by the highest value combination of package bids with each bidder winning at most one of its package bids.

35. Concerns regarding complexity: The CCA format is new and for potential bidders who are not familiar with the format, it may take additional effort to understand it thoroughly. The complexity concerns raised by stakeholders can be addressed through increased training, including early access to the winner and price determination software (the solver) and additional mock auctions.

36. Complexity of winner and price determination: In a CCA, calculations are made to determine the winning bidders, licences won and prices to be paid. The solver is required for the determination process given the number of possible combinations of packages that might be present. It may be unfamiliar to potential bidders, as it was not used in previous Canadian spectrum auctions.

37. To provide transparency and increase familiarity with the process for winner and price determination in the CCA, Industry Canada has provided the winner and price determination explanations for the process (Annex B) and has published details of the algorithm that will be used to determine winning bidders and prices to be paid.^{Footnote 9} Industry Canada is also planning to release bidding information after the conclusion of the auction.

38. Eliminating or restricting bidding in the supplementary round: The supplementary round is a fundamental part of the CCA format. In each clock round, bidders are limited to bidding on a single package at given prices. However, as there may be many packages that a bidder is interested in and eligible to bid on, the supplementary round gives bidders the opportunity to place their best and final bids on these packages at prices reflecting the valuation that they have for the combination of licences. These supplementary bids are critical in ensuring that the licences are allocated to the bidders that value them the most and in ensuring that winning bidders pay an amount that is sufficient to ensure that no other bidder or group or bidders was willing to pay more for the licences.

39. Restricting what bids can be won: SaskTel’s proposal that the winning combination of packages should "satisfy a constraint that every bidder has to win a package that includes at least its final clock package" would provide more certainty to bidders, as they would know what they would win at a minimum. However, the constraint could result in a less efficient outcome where there would be other bidders willing to pay more than the winning bidder. It could also create incentives and opportunities for anti-competitive behaviour, as bidders could submit bids for licences that they are not interested in for the sole purpose of causing price damage to others, with little or no risk to themselves.

40. Restricting allowable packages: It is expected that a bidder could have a legitimate demand for any combination of the spectrum blocks available in the auction given the length of the licence term and potential ecosystem developments over the course of the licence term. Imposing additional constraints on allowable packages could reduce a bidder’s flexibility to make decisions during the auction, based on the price discovery information it is receiving and its own valuation of the spectrum.

Decision

4.1.1 Categories of Generic Licences

42. Generic licences are blocks of spectrum that are similar enough and of comparable value such that they can be offered in a single category. 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. Industry Canada sought comments on the following proposed categories of 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).

43. Industry Canada proposed that block A be a separate fourth category in each service area.

44. Industry Canada also proposed that if a bidder wins block A and one of blocks B and C in a service area, then that bidder would automatically be assigned blocks A and B in that service area.

Summary of Comments

45. Bell, Rogers, SaskTel, Sogetel, TELUS, WIND and Xplornet supported the proposed categories of generic licences and the proposal to guarantee contiguity across blocks A and B in a given service area.

46. MTS Allstream submitted "that blocks B and C in the Lower 700 MHz band should not be treated as generic licences, since some bidders will value block B spectrum more than block C spectrum." This comment was supported by Quebecor in its reply comments.

47. Public Mobile did not support the proposal to guarantee contiguity as it "distorts the value of the Lower A and Lower B blocks so that the Lower B block ceases to be ‘generic’."

48. Rogers recommended that Industry Canada combine the D and E blocks into a single block "which would better reflect bidders’ true demand for the spectrum and prevent abuse." Bell, MTS Allstream and TELUS disagreed with Roger’s proposal, arguing that it would reduce flexibility for bidders that are only interested in one unpaired block.

49. Rogers proposed that a bidder be automatically assigned contiguous spectrum when it "wins one of the D and E licences and one of the B and C licences in a given service area," as it would greatly simplify the assignment stage. To facilitate this, it suggested an alternative hierarchical approach wherein contiguity across blocks A, B/C and D/E within each service area would be resolved first based on a set of rules, then on geographic contiguity across adjacent service areas, and finally, on an assignment round for the unresolved assignments. Bell, MTS Allstream and Public Mobile disagreed with the recommendation for contiguity across blocks B/C and D/E; in addition, Bell and SaskTel disagreed with Rogers’ proposal on how to resolve potential contiguity conflicts across service areas.

Discussion

50. The use of generic licences enhances the possibility of substitution and reduces the number of combinations on which bids may be placed, simplifying the bidding process for bidders. The proposed 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.

51. Separating blocks B and C: Although the demand for block B may be higher than for block C given the current ecosystem, blocks B and C are technological substitutes. Any additional value that a bidder places on the individual licence is because it can be paired with another licence. Keeping blocks B and C together will be simpler for bidders, as there will be fewer products (56 instead of 70) and fewer possible combinations, facilitating substitution and expediting the auction.

52. Removing the guarantee of contiguity across blocks A and B: The proposal to guarantee contiguity across blocks A and B recognizes that contiguous spectrum is technologically more efficient and therefore preferable. The guarantee will reduce predatory bidding in the assignment stage, where a bidder that wins one B/C licence could place insincere bids to make the AB combination impossible or more expensive for its competitor. While the possibility does exist that a bidder may find itself with AB licences in some service areas and C licences in others, contiguity across blocks in a service area is considered more important than a consistent block across service areas.

53. Combining D and E into a single block: Decisions with respect to block size were announced in SMSE-002-12, Policy and Technical Framework: Mobile Broadband Services (MBS) — 700 MHz Band, Broadband Radio Service (BRS) — 2500 MHz Band. Licensing the unpaired blocks in the lower 700 MHz as two separate blocks rather than a single block provides flexibility for bidders that are only interested in one unpaired block. Bidders interested in both blocks can still bid for them without risking winning only one of the blocks.

54. Guarantee of contiguity across blocks B/C and D/E: Anticipated future use of the lower D and E blocks involves mobile broadcasting and/or mobile broadband supplemental downlink, which suggests that the blocks will not be used in conjunction with other 700 MHz spectrum; hence, a guarantee of contiguity is not considered to be necessary. Any bidder that has a preference for specific licences will be able to express that preference in the assignment stage.

55. Further rules for contiguity: Prioritizing contiguity first within a service area and then across specified pairs and groups of regions would further complicate the auction and could disadvantage bidders that would not have an opportunity to express their preference either within or across regions.

Decision

4.1.2 Structure of the Assignment Rounds

58. Industry Canada proposed to run three sequential assignment rounds (i.e. one for each category of generic licences): blocks B and C; blocks D and E; and blocks C1 and C2.

Summary of Comments

59. Bell supported the structure for the assignment rounds as proposed.

Discussion

60. The structure for the assignment rounds was proposed to allow bidders that have won licences in the same category of generic licences across multiple service areas to express their preferences for particular licences.

61. The only suggestion for change related to the assignment rounds was Rogers’ suggestion with respect to added rules for contiguity across blocks of licences, discussed in Section 4.1.1.

Decision

4.1.3 Activity Rule — Clock Rounds

63. Industry Canada sought comments on the proposal to use an activity rule for the clock rounds that is a combination of the eligibility-based activity rule used in previous SMRA auctions and a revealed preference activity rule. The revealed preference activity rule allows a bidder to bid on a package that exceeds its current eligibility provided that it has become relatively less expensive than packages that the bidder has bid on in all previous eligibility-reducing rounds.

Summary of Comments

64. Bell, SaskTel, Sogetel, TELUS and WIND supported the proposed activity rule for the clock rounds.

65. Rogers stated that the proposed activity rule is too restrictive and suggested that bids on packages that exceed a bidder’s current eligibility only be subject to revealed preference with respect to the last clock round in which the bidder had sufficient eligibility to bid on the package. In the reply comments, Public Mobile supported Rogers’ proposed changes, whereas Bell did not. TELUS submitted that it would support Rogers’ recommendation for a more relaxed revealed preference activity rule in the clock rounds "as long as the bid still satisfied the revealed preference constraints at each intermediate eligibility‑dropping juncture between the current round, and the last round at which the bidder had the desired level of eligibility."

66. Public Mobile commented that the rules on eligibility points may distort bidding by encouraging bidders to bid on packages with relatively more eligibility points rather than on their most preferred package in order to maintain their eligibility for later rounds; however, Public Mobile recognized that the revealed preference limit should help to mitigate its concern.

Discussion

67. The clock rounds activity rule for the 700 MHz auction was proposed to provide bidders with the motivation and flexibility to always bid on their most preferred package, improving price and allocation discovery in the clock rounds. Using only an eligibility-based activity rule in the clock rounds would prevent a bidder from placing bids on its most preferred package if that package exceeds its eligibility.

68. A bidder is always able to place bids that are consistent with its eligibility points. However, adding the revealed preference activity rule affords extra flexibility to the bidder by allowing it to bid on a larger preferred package that has become relatively less expensive, providing an easy way for bidders to adjust their bid in response to information received in the clock rounds.

69. Reduce the number of revealed preference constraints: There is a trade-off in setting the activity rule in the clock rounds. On the one hand, many constraints help to promote truthful bidding and hence price discovery and, on the other hand, fewer constraints allow bidders the flexibility to revise bids in response to price and demand information. The proposed activity rule strikes a balance; it supports bidders being able to revise their bids consistently with their underlying values, yet it does not undermine price discovery. Bidders will also have the opportunity to place bids in the supplementary round for packages that they did not bid on in the clock rounds.

70. Bidding on larger packages to maintain eligibility: As noted by Public Mobile, the revealed preference activity rule mitigates the incentive that bidders may have to bid on larger packages to maintain eligibility. As well, in a CCA, all bids are binding, so the risk associated with bidding on unwanted licences in order to maintain eligibility points is increased given that a bidder could ultimately win that package.

Decision

4.1.4 Activity Rule — Supplementary Round

73. Industry Canada sought comments on its proposal to use an activity rule in the supplementary round based on revealed preference limits with respect to the bids submitted in the clock rounds. The rule would require that all of a bidder’s supplementary bids satisfy revealed preference with respect to the final clock round and with respect to clock rounds where it reduced eligibility points beginning with the last clock round in which the bidder was eligible to bid on the package.

74. There were two exceptions: (1) bids on the final clock package could be an unlimited amount; and (2) bids on a package comprised of the final clock package plus any or all licences provisionally unallocated in the final clock round would be required to satisfy revealed preference with respect to the final clock round only.

75. The revealed preference limit with respect to the final clock round provides an opportunity for bidders to guarantee winning their final clock round packages.

Summary of Comments

76. Bell, WIND and Sogetel supported the proposed activity rule for the supplementary round.

77. Quebecor, SaskTel, MTS Allstream and Eastlink expressed concerns that only larger bidders would have the financial resources to be able to guarantee winning their final clock package and that even if a smaller bidder is able to submit the required bid increase for the guarantee, this amount would be far less restrictive for a large national bidder given that the increment is the same for all bidders.

78. SaskTel proposed that in order to guarantee winning one’s final clock package, a bidder should only have to increase the bid amount of its final clock package by the value of the unallocated licences in service areas where it bid in the final clock round. Only Xplornet stated that it supports this proposal.

79. Mobilicity submitted that with the proposed activity rule, there is scope for insincere bidding in the supplementary round, suggesting that some bidders may not have the incentive to reveal all their preferences so as to not reduce the likelihood of winning their most preferred package, whereas other bidders may have an incentive to place bids to raise the prices for winning bidders.

80. Rogers submitted that the proposed activity rule could lead to strategic behaviour, allowing bidders to place bids on packages that they do not necessarily want merely to increase the prices for the winning bidders. It recommended eliminating the revealed preference constraint with respect to the final clock round and only applying the revealed preference constraint to the last clock round in which the bidder was eligible to bid on the package. In the reply comments, Public Mobile supported Rogers’ proposal, whereas Bell, MTS Allstream, Quebecor and TELUS did not. MTS Allstream submitted that additional revealed preference constraints should be applied to supplementary round bids such that they are “consistent with the clock round revealed preference rule, rather than the reverse as proposed by Rogers.”

81. In addition, Rogers did not support the two exceptions to the proposed supplementary round activity rule for a bidder’s final clock package and for final clock packages plus unallocated licences, and recommended that revealed preference constraints be applied to all packages, including the final clock package when it exceeds the bidder’s eligibility in the final clock round. In the reply comments, TELUS supported Rogers’ recommendation, submitting that the only uncapped bid in the supplementary round should be the last bid in the clock rounds that did not exceed the bidder’s final eligibility. Bell did not support Rogers’ recommendation.

82. In its reply comments, WIND indicated “that an auction consistent with Industry Canada’s objectives could be conducted” using the modified activity rules for the supplementary round proposed by Rogers, "so long as bidders active on spectrum in the final clock round are still allowed to purchase excess supply (if any) at final clock round prices."

Discussion

83. The activity rule in the supplementary round was proposed to motivate truthful bidding throughout the auction, promoting greater price discovery in the clock rounds and more certainty regarding the auction outcome. This occurs because a bidder’s supplementary bids are constrained by its bids in eligibility-reducing rounds as well as the final clock round, and the bidder does not know which will be the final clock round. In addition, the revealed preference constraint with respect to the final clock round reduces the likelihood that the results of the final clock round will be overturned and it provides bidders with the ability to guarantee that they win their final clock package.

84. Although the proposed activity rule has several advantages, the strong predictability between the final clock allocation and the outcome of the supplementary round could have unintended consequences for bidder incentives in the supplementary round. Bidders could have an incentive to place risk-free supplementary bids that have no chance of winning and that serve only to increase the payments of their competitors. On the other hand, because of the strong predictability, bidders may decide that they have no compelling need to submit supplementary bids, which could potentially result in a less efficient outcome.

85. Other options: Given the aforementioned unintended consequences of the proposed activity rule, Industry Canada has considered other activity rules that would sufficiently preserve the strong incentives for truthful bidding during the clock rounds but also during the supplementary round.

86. The activity rule proposed by Rogers, known as the relative cap, would require that all supplementary bids only satisfy revealed preference with respect to the last round in which the bidder was eligible to bid on the package. Truthful bidding would still be encouraged in the clock rounds and in the supplementary round, as all bids are binding. However, as there are fewer constraints relative to previous bidding behaviour, price discovery could be impeded.

87. An alternative option would be to maintain the activity rule as proposed in the consultation but to withhold the aggregate demand information from the final clock round until the end of the auction. Similar to the proposal, this option would provide strong incentives for truthful bidding; however, it would reduce the opportunity for bidders to place risk-free bids that have no chance of winning and that serve only to increase the payments of their competitors. Furthermore, the amount needed to guarantee that a bidder wins its final clock package would be unknown.

88. Concerns that the activity rule favours larger bidders: Industry Canada acknowledges the concerns expressed that the bid increment that a bidder could be required to make in the supplementary round to guarantee winning its final clock package could be less restrictive for a larger bidder than for a smaller bidder and has considered other options for the activity rule in the supplementary round.

89. Concerns about the proposed exception for a bidder’s final clock package: The intent of the exception for a bidder’s final clock package is to make the process for submitting supplementary bids more intuitive while still encouraging truthful bidding throughout the auction.

90. Concerns about the proposed exception for a bidder’s final clock package plus unallocated licences: The proposed exception that the final clock package plus unallocated licences only needs to satisfy revealed preference with respect to the final clock round was intended to provide more flexibility to bidders. However, the proposed exception for a bidder’s final clock package plus unallocated licences would no longer be practical with the alternative option considered above, as bidders would not know which licences are unallocated. In addition, if applied with the relative cap option, it could prove more restrictive.

Decision

4.1.5 Pricing Rules

93. Industry Canada sought comments on the proposal to use a second-price rule to determine the price that winning bidders would be required to pay. 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.

94. More specifically, Industry Canada proposed to apply bidder-optimal core prices and to use a "nearest Vickrey" approach to determine second prices. In some cases, the second price (Vickrey price) may not be high enough to ensure that there is no alternative bidder or group of bidders prepared to pay more for the licences in question, and so an additional payment above Vickrey prices is required. In the event that such a payment is required, Industry Canada proposed to weight the portion of the additional payment to be paid on the winning package sizes evaluated at the opening bid prices.

Summary of Comments

95. Bell, MTS Allstream, Public Mobile, Rogers, Sogetel, Tbaytel, TELUS, WIND and Xplornet supported the proposal to use a second-price rule.

96. MTS Allstream and Sogetel supported weighting additional payments based on opening bid prices, as proposed in the consultation paper.

97. Rogers, supported by Bell in the reply comments, suggested that payments be split equally among bidders rather than weighted based on package size. Rogers argued that the proposed weighting is not equitable for bidders and that it provides a bidder with a large package of licences greater incentive to shade its bids in order to reduce its share of the increase in price due to the weighting, which would cause prices to increase disproportionately for bidders with small packages of licences.

98. Several respondents suggested using different weightings for additional payments, including winning bids (Public Mobile and Xplornet), final clock round prices (SaskTel, Tbaytel and TELUS) or a ratio of final clock round prices or winning bids to opening bid prices (Tbaytel and Xplornet).

Discussion

99. A second-price rule was proposed, as it promotes a more efficient outcome by increasing the incentive for bidders to bid in a way that is consistent with how they truly value the licences. Bidders, knowing that they will only be required to pay the amount determined by the second-price rule, will have a greater incentive to bid truthfully during the entire auction. This promotes an efficient auction outcome.

100. Weighting additional payments based on the winning package size was proposed because it ensures that each bidder’s share of the additional payment is in relation to the size of its package.

101. Splitting additional payments equally: Splitting the additional payment equally, as proposed by Rogers, would favour bidders with large packages of licences, as the additional payment would represent a smaller amount relative to their package size. Moreover, weighting the additional payment based on the winning package sizes is unlikely to result in bid shading given that it will be difficult to predict the combination of packages that will create this situation, the bidders affected and the amount of the additional payment required.

102. Alternative weighting approaches: Different approaches for weighting the additional payment based on the winning package sizes should give the same or similar result; however, different approaches may impact the incentive to bid truthfully during the auction. By weighting the additional payment using opening bid prices, bidders are not able to adjust their share of the additional payment based on their own bids, which will encourage truthful bidding.

Decision

4.1.6 Reserve Bidder

104. In the consultation paper, a "reserve bidder" approach was proposed wherein Industry Canada would act as though it was a bidder in the auction, placing a bid on every licence at the opening bid price. This approach would ensure that the incremental amount bid for an additional licence was at least the opening bid price for that licence.

Summary of Comments

105. Rogers and Public Mobile did not support the proposed approach, submitting that it could lead to unsold blocks even when there is demand for those blocks. In their reply comments, Bell, MTS Allstream and TELUS did not support the proposal either.

106. In its reply comments, Sogetel indicated that it supports this approach, as it reduces the bid increment required to guarantee winning a bidder’s final clock package. MTS Allstream submitted that if Industry Canada eliminates or reduces the proposed approach, then it "should ensure that doing so would not otherwise increase the cost of the guarantee bid required to secure bidders’ final clock packages."

Discussion

107. The opening bid price for each licence is the minimum that Industry Canada would accept for the licence. The approach proposed by Industry Canada, known as the reserve bidder approach, operationalizes this view in a CCA by requiring that the incremental amount that a bidder bids on an additional licence be at least the opening bid price of that licence.

108. In all CCAs to date, bidders were required to bid at least the sum of the opening bid prices for all licences included in their package. This is known as the bounds only approach. If a bidder places a bid on a package at a price that is higher than the sum of the opening bid prices for these licences, the bidder can potentially add licences to its package without having to increase the total amount bid. Under the reserve bidder approach, if a bidder wants to add another licence to its package, it must increase the amount bid by at least the opening bid price of that licence.

109. The reserve bidder approach does not favour one particular type of bidder. The bounds only approach implicitly favours bidders with a large package of licences, as bidding above the opening bid price on more licences could make it easier to include additional licences in a package without having to increase the amount bid.

Decision

4.1.7 Information Disclosure to Bidders During the Auction

111. Industry Canada sought comments on the proposal to use anonymous bidding during the clock rounds, revealing to each bidder only its own bid information from the previous round and its eligibility for the next round. All bidders would be informed of the aggregate demand for each product from the previous round and the price of each product for the next round.

112. Industry Canada proposed to inform all bidders at the end of the allocation stage about the number of winning bidders and the total number of licences allocated, and to inform each bidder of its own winning package, along with the base price to be paid.

113. Industry Canada proposed that participating bidders be notified of the specific licences that they had won and the assignment price(s) to be paid at the end of the assignment stage.

Summary of Comments

114. MTS Allstream, PIAC, Public Mobile, Rogers, SaskTel, Sogetel and WIND all supported the use of anonymous bidding during the clock rounds. Bell stated that it does not support the use of anonymous bidding and that “at a minimum, it is appropriate to know what packages other bidders are bidding on at each round.” In its initial comments, TELUS supported anonymous bidding, but reversed its position in its reply comments.

115. Rogers proposed that "Industry Canada release full information about all winning bids and bidders" after the conclusion of the allocation stage. TELUS supported Rogers’ proposal.

Discussion

116. Publication of bidder names and current bids following each round: The proposal by Bell not to use anonymous bidding (supported by TELUS in the reply comments) could result in bidders focussing on the bidding behaviour of other individual bidders rather than on their own valuations in relation to the price and demand information. It would also increase the potential for gaming and anti-competitive behaviour, complicating the bidding process for bidders and possibly leading to a less efficient outcome. For these reasons, auctions around the world in recent years have featured anonymous bidding regardless of the format used.

117. Information released at the end of the allocation stage: Revealing information about the winning bidders and the packages that they have won at the end of the allocation stage (and prior to the assignment stage), as proposed by Rogers and supported by TELUS, could lead to anti-competitive behaviour, such as predatory bidding, in the assignment stage.

Decision

4.1.8 Public Information Disclosure

122. Industry Canada proposed that information on the aggregate demand for each product and the price for each product be made available on its website at the end of each clock round. It was also proposed that the identities of the winning bidders, their winning packages and the prices to be paid, along with all bidding information, be published following the conclusion of the auction.

Summary of Comments

123. No comments were received on the proposal to publish information on the prices and aggregate demand in each clock round on Industry Canada’s Spectrum Management and Telecommunications website.

124. Rogers, Sogetel, TELUS, Bell and MTS Allstream support full disclosure of all bids following the auction.

125. Public Mobile submitted that it is concerned that full disclosure could reveal commercially sensitive information, particularly in light of the upcoming 2500 MHz auction. Quebecor, in its reply comments, suggested that Industry Canada devise a better post-auction information disclosure plan to ensure that bidders’ strategic information is protected.

Discussion

126. Given the use of anonymous bidding, information will not be released while the auction is under way.

127. While the publication of the results and of all bidding information at the end of the auction could result in disclosure of information that some companies may consider commercially sensitive, this concern is outweighed by the public interest. Full disclosure allows all interested parties to verify and replicate the results of the auction, facilitating greater transparency of the auction results.

Decision

4.1.9 Bid Increments

129. In the consultation document, Industry Canada indicated that it will use activity-based bid increments, where the increment for each product will be based on the level of excess demand for the product during the previous round.

Summary of Comments

130. MTS Allstream submitted that it agrees that the magnitude of bid increments should decline in later rounds as the level of excess demand decreases.

131. Tbaytel requested that a "clear model be developed and provided in which the methodology for tying bid value (on an incremental basis) is fully defined."

132. SaskTel proposed the use of staged bid increments, whereby larger bid increments would be used in the early rounds of the auction and in further rounds, as demand begins to drop, the increments could be decreased. Bell did not agree with this proposal.

133. Rogers submitted that Industry Canada should specify the exact formulas that will be used to calculate the bid increments on each product in advance of the auction. It also proposed that bid increments be set within a specific range of 5-10% and that all increments be capped at $10 million. TELUS supported this proposal in its reply comments. Bell did not agree with this proposal.

Discussion

134. Bid increments are established so that the auction progresses in a timely manner. With activity-based bid increments, products that generate greater excess demand are subject to a larger bid increment than products that generate less excess demand. Bid increments increase more quickly for products with higher demand, potentially shortening the length of the auction, and will generally decline over the course of the clock rounds as demand for the licences approaches available supply.

Decision

4.1.10 Number of Supplementary Bids

136. Industry Canada proposed that a bidder can submit supplementary bids for up to 500 different packages.

Summary of Comments

137. In its comments, Rogers proposed increasing the number of supplementary bids from 500 to 2,000. Bell and MTS Allstream disagreed with Rogers’ proposal, whereas TELUS and Public Mobile generally supported Rogers’ proposal.

Discussion

138. The limit on the number of bids in the supplementary round is a software limitation. Depending on the number of qualified bidders, it may be possible to increase the number of different packages for which a bidder will be allowed to place supplementary bids.

Decision

4.2 Opening Bids

140. Industry Canada sought comments on the proposed opening bids, which are the prices for the spectrum licences at the start of the auction, and the minimum that will be accepted for each licence. The proposed 700 MHz opening bid prices took into account the results of past Canadian auctions, reflecting the relative value of the licences in the different service areas. As a minimum acceptable price, the existing Cellular and PCS annual fee, adjusted to account for a licence term of 20 years using a 14% discount rate^{Footnote 10} was used. The proposed opening bid prices were rounded to the nearest thousand dollars.

141. With respect to the paired spectrum, proposed opening bids for nine of the 14 service areas were based on the minimum acceptable price level. Three of the remaining five service areas (Eastern Ontario and Outaouais, Alberta and British Columbia) were 1.2 times this price level, whereas the two remaining service areas (Southern Ontario and Southern Quebec) were 2.6 times the minimum price level.

142. Given the current uncertainty with respect to the use and technology associated with the unpaired blocks D and E, their opening bid prices were also based on the minimum acceptable price.

Summary of Comments

143. Bell, SaskTel and WIND supported the proposed opening bids.

144. Some respondents stated that the proposed opening bids were too high, which could act as a barrier to participation in the auction and/or deployment of the spectrum, and that they should be lowered either in all areas (Public Mobile, Quebecor) or in certain service areas (Eastlink, SSi and Sogetel) and provided suggestions in this regard.

145. Rogers suggested that the opening bid prices for the paired licences in Southern Ontario and Southern Quebec, especially for block A, be lowered to $0.327/MHz/pop. It expressed concern that the relative difference between the opening bid prices for these service areas and others was too high and that this could negatively affect bidding and price determination where opening bid prices could play a role. This concern was supported by TELUS in its reply comments.

146. TELUS suggested that the proposed opening bids be used as reserve prices with separate lower opening bids to allow for price discovery.

Discussion

147. The proposed opening bid prices reflect a conservative estimate of the market value of the spectrum licences in each service area, i.e. high enough so that Canadians receive a fair return for the use of the spectrum, but at a level that does not discourage participation in the auction.

148. In determining the proposed opening bid prices, results of past Canadian PCS and AWS auctions, as well as the current annual fee for Cellular and PCS licences, were taken into consideration. The minimum opening bid prices are based on the current annual fee for Cellular and PCS licences. This fee has been in place since 2004 and is a fee that national operators, large regional operators and smaller operators are paying today in all regions of the country, demonstrating that the 700 MHz licences are likely worth at least this value.

149. General recommendations for lower opening bids: For the majority of the licences, the proposed opening bid prices reflect the annual Cellular and PCS fee that is currently being paid for similar licences, including those in low population areas. Given that 700 MHz spectrum is considered at least as valuable as Cellular spectrum, this suggests that the proposed minimum acceptable price level for the 700 MHz auction is set conservatively. The values of blocks A, D and E are less certain than those of the other blocks. However, recent developments in the United States suggest that there will be opportunities where this spectrum will be suitable for mobile use, with block A providing opportunities comparable to blocks B and C, and blocks D and E being used in conjunction with other bands to provide supplementary downlink use.

150. Lower opening bids for Southern Ontario and Southern Quebec: The proposed opening bids reflect a conservative estimate of the market value of the spectrum. Lowering the opening bid prices for Southern Ontario and Southern Quebec as suggested would imply that the expected market values of spectrum in these two service areas are comparable to those in the Eastern Ontario and Outaouais, Alberta and British Columbia service areas, as the proposed opening bid for these service areas is $0.327/MHz/pop. However, the results from the AWS and PCS auctions suggest that the market value of spectrum in Southern Ontario and Southern Quebec is higher than elsewhere.

151. Decoupling reserve prices from opening bid prices and lowering opening bids: Setting separate reserve prices and lower opening bids could allow for additional price discovery. However, the proposed opening bid prices have been established conservatively and there is already an indication of the value of 700 MHz spectrum, as it has been deployed in the United States since 2007. Consequently, bidders will not be discouraged from participating in the auction or from bidding for particular licences and there remains opportunity for price discovery in the auction.

Decision

4.3 Eligibility Points

153. Each licence has been assigned a specific number of eligibility points. These points are used in the determination of the pre-auction financial deposits and in the activity rules during the auction, influencing the bids that bidders can submit (refer to Section 4.1.3, Activity Rule — Clock Rounds and Section 4.1.4 Activity Rule — Supplementary Round). A bidder’s initial eligibility is based on its pre-auction financial deposit and defines the upper limit of licences for which the bidder can bid. Subsequent eligibility points are based on bids placed in prior clock rounds.

154. Industry Canada sought comments on its proposed eligibility points for the 700 MHz auction licences, which were based on the population per service area, bandwidth per block and the relative value of the spectrum.

155. It was proposed that one eligibility point be assigned for each 5 MHz of spectrum per 100,000 in population count in a service area, rounded to the nearest 100,000 population, for the majority of service areas.^{Footnote 11} The five service areas of Southern Quebec, Eastern Ontario and Outaouais, Southern Ontario, Alberta and British Columbia were the exception. For these five service areas, the eligibility points per paired spectrum block were adjusted to reflect the relative value of the spectrum, as expressed in the opening bids.

Summary of Comments

156. Eastlink and Rogers indicated that eligibility points should be adjusted to reflect changes that they proposed to the opening bid prices.

157. Bell suggested reducing eligibility points for block A to the same level as blocks D and E, to reflect the difference between its value and that of other paired spectrum blocks.

158. Public Mobile proposed that Industry Canada assign eligibility points to service areas based on population groupings of the service areas, and added that removing the differentiation between regions would simplify eligibility points and improve flexibility.

159. Rogers and TELUS suggested simplifying the eligibility points by applying a ratio of 2:1 for paired and unpaired blocks so that bidders can easily switch between one paired and two unpaired blocks in every service area.

Discussion

160. The proposed opening bid prices for the 700 MHz auction are based on an estimated market value for the spectrum. Giving consideration to the relative value of the spectrum in the determination of the eligibility points supports substitution between licences that are similar in value and enhances price discovery. The proposed eligibility points reflect this approach and take into consideration the population per service area, bandwidth per block and the relative value of the spectrum, as expressed in the opening bids.

161. Lower eligibility points for block A: Although there are currently some uncertainties with regard to the ecosystem support for block A and the extent of interference with channel 51 as indicated by Bell, developments in the United States suggest that block A will provide opportunities comparable to blocks B and C. It is therefore desirable to maintain eligibility points for block A relative to the opening bids in order to facilitate substitution between block A and other paired blocks.

162. Assigning eligibility points based on population groupings: The value of spectrum is not equal in all areas and removing the relative values from the proposed eligibility points could undermine substitution and price discovery, potentially resulting in a less efficient outcome.

163. Adjusting the ratio of eligibility points between paired and unpaired blocks: Simplifying the eligibility points to a 2:1 ratio for paired and unpaired blocks as proposed by Rogers and TELUS would fail to recognize the higher expected value for paired blocks in Southern Quebec, Southern Ontario, Eastern Ontario and the Outaouais, Alberta and British Columbia as indicated in past auctions. However, where the price levels are the same, a 2:1 ratio for the paired and unpaired blocks does have merit, as it would permit bidders to switch easily between one paired block and two unpaired blocks.

Decision