T-Mobile, AT&T each worried about bidding manipulation in 600 MHz auction

T-Mobile US (NYSE:TMUS) likely has lost the fight over the size of the spectrum reserve in next year's incentive auction of 600 MHz broadcast TV spectrum. But the carrier is now proposing the FCC change a rule on when bidding for that reserve will kick in.

Meanwhile, AT&T (NYSE: T) is concerned that carriers that bid on the reserved spectrum will manipulate bidding. It's all part of a cat-and-mouse game with the FCC and its commissioners ahead of a July 16 vote on the auction's rules.

The incentive auction consists of two main parts. The first is a "reverse" auction, in which broadcasters agree to sell their spectrum rights, with prices going down in each round. After each round of the reverse auction the FCC will "repack" the broadcasters based on the results of each round, so that they broadcasters know whether or not there is space for them in the TV band. Once the rules for the reverse auction are met, then the "forward auction" is held for carriers to bid on generic blocks of broadcaster spectrum. There will also be an "assignment round" in the forward auction for carriers to bid on specific spectrum bands. If the FCC's "final stage rule" is met, then bidding on the reserved spectrum can begin. After the auction ends, the FCC will then reassign broadcasters into new channels.  

Trey Hanbury, an attorney at Washington law firm Hogan Lovells representing T-Mobile, wrote in a June 30 FCC filing that as currently proposed, for the spectrum reserve to come into being, two price "triggers" need to be met. Currently, the FCC plans to set aside up to 30 MHz of spectrum in a given market for carriers with less than 45 MHz of low-band spectrum in that market. Verizon Wireless (NYSE: VZ) and AT&T will not be able to bid on such reserved spectrum in many markets across the country, especially in major cities.

The first trigger occurs when auction proceeds in the top 40 Partial Economic Areas (PEAs) exceed an average price of $1.25 per MHz-POP, as the FCC proposed in December. The second trigger occurs when the forward auction raises enough money to both reimburse all broadcasters that give up their spectrum and cover other remaining auction expenses, such as repacking. If the auction fails to satisfy both triggers though, the reserve does not come into being.

"While the first price trigger does not necessarily reintroduce the risk of foreclosure pricing by AT&T and Verizon, the second trigger does," Hanbury wrote. "The risk of the second trigger is not a function of reserve-eligible bidders being unwilling to pay all broadcast expenses. After all, the auction cannot close--and no licenses of any kind will be awarded--if broadcast expenses are not fully satisfied. The risk of the second trigger is that high clearing costs in the early rounds of bidding under a high clearing target create a 'hangover effect' for subsequent stages of the auction."

Basically, T-Mobile is concerned the reserve would not be created until bids for spectrum are already very high. The company is worried that if broadcasters give up a lot of spectrum, the cost of relocating them will also be great, and if early bidding in the forward auction approaches but does not surpass the trigger that creates the reserve, the high bids will "still hang over all subsequent stages of the auction even though the amount of spectrum available is less than in the initial stages."

"The spectrum reserve, in other words, could prove meaningless because no reserve-eligible bidders would remain in the auction at foreclosure-level prices," Hanbury wrote.

T-Mobile is proposing that the FCC keep the proposed double trigger of the current reserve, but incorporate a third "safety-valve" mechanism to start the reserve bidding.

"Under this proposal, the Commission would retain the $1.25 price per MHz-POP trigger in the top 40 PEAs, but would amend the spectrum-reserve trigger to be either (1) an average of $2.00 per MHz-POP in the top 40 PEAs; or (2) the price for satisfying all broadcaster reimbursement and repacking costs as well as auction administrative costs, whichever occurs first," Hanbury wrote.

T-Mobile says the additional trigger "would help protect against the risk of foreclosure while ensuring that all bidders in the forward auction pay their fair share of broadcast-clearing expenses. The FCC established a spectrum reserve to ensure that competitors with little or no low-band spectrum have a meaningful opportunity to obtain this critical resource without the risk of foreclosure. T-Mobile is concerned that, as structured, the reserve might be gamed by the largest carriers to never come into existence, and T-Mobile therefore respectfully asks that the FCC make the limited modification requested."

Rebecca Murphy Thompson, general counsel at the Competitive Carriers Association, shared T-Mobile's worries. She wrote to the FCC that the agency "should trigger the spectrum reserve early enough in the auction for it to offer a viable safeguard against foreclosure. The currently proposed trigger for creating the spectrum reserve opens opportunities for gaming if the Commission pursues high clearing targets--with attendant high clearing costs--at the outset of the auction, but later falls back to a lower clearing target with lower clearing costs during a subsequent round."

Thompson noted that a reserve "that is triggered only after competitive carriers have been foreclosed from participation would not achieve the goal of distributing spectrum licenses to a broad variety of applicants."

CCA wants the spectrum reserve to contain the licenses with the least amount of interference concerns. "Placing relatively unimpaired spectrum in the reserve will help ensure that competitive carriers, who need this low-band spectrum to compete, have an adequate opportunity to gain access to it," she wrote.

On the opposite end of the spectrum, Joan Marsh, AT&T's vice president of federal regulatory affairs, spoke on June 29 with Howard Symons, vice chair of the FCC's Incentive Auction Task Force. Marsh thinks the FCC's current proposals "create both the incentive and ability for reserve-eligible bidders to manipulate bidding in a manner that suppresses bid amounts in the reserve auction while bidding up prices in the unreserved auction."

"We understand that, under the Commission Staff's recommendation, when the final stage rule is met, if total demand by reserve eligible bidders exceeds supply of reserve spectrum, the excess demand will be allocated exclusively to the unreserved auction," she wrote. "Thus, by design, the clock price in the reserve auction will stop (because demand will equal supply), but the clock price in the unreserved auction will continue to rise as long as demand in that auction exceeds supply. Moreover, because the FCC's proposed trigger for splitting the auction into reserved and unreserved may occur when average prices are at a level of only $1.25 MHz/pop, this would effectively result in selling the reserve spectrum at a level that is less than half as much as the price of AWS-3 spectrum sold earlier this year."

Marsh is worried that smaller carriers would be able to, in effect, bid up prices in the unreserved auction "while keeping prices in the reserve auction much lower." Such a strategy, she wrote, "could impose a significant price penalty on bidders that are not reserve eligible and thus must express their demand in the unreserved auction."

Marsh thinks all reserve-eligible demand for a category of spectrum in a given PEA should be assigned to the lowest price spectrum available. "Imposing this restriction would not limit the ability of reserve eligible bidders to bid for and win unreserved licenses," she wrote. "It simply prevents them from bidding up those prices when lower priced reserve spectrum is available."

For more:
- see this T-Mobile filing
- see this AT&T filing
- see this AT&T blog post
- see this CCA filing

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