Market mechanisms and the efficient use and management of scarce spectrum resources.

• Author: Beard, T. Randolph

Table of Contents I. INTRODUCTION II. BACKGROUND III. INEFFICIENT USE OF SPECTRUM BY GOVERNMENT A. Economics of Inefficient Use B. Pricing Spectrum to Improve Efficiency--Or Not IV. THE EFFICACY OF EXISTING PROPOSALS TO IMPROVE GOVERNMENT'S EFFICIENT USE OF SPECTRUM A. The "GSA Model" B. Setting the Efficient Level of Spectrum Use 1. Treating Spectrum as an Asset 2. A Failure in Accountability C. Spectrum Currency as a Ghost Market Mechanism D. Other Options V. GOVERNMENT INEFFICIENCY AND SPECTRUM ALLOCATION BETWEEN PUBLIC AND PRIVATE USERS A. Formal Economic Model of Spectrum Allocation Between Private and Public Sectors B. Market Management of All Spectrum C. Caveats VI. Conclusion I. Introduction

In light of the rapid growth of demand for data transmission on mobile wireless networks, the Federal Communications Commission's ("FCC") 2010 National Broadband Plan proposed to increase the amount of spectrum available for flexible commercial use by 500 MHz by 2020, with 300 MHz of this additional spectrum available for mobile broadband use by 2015. (1) The National Broadband Plan proposes to increase significantly the amount of spectrum used for mobile communications service in the hopes of postponing the effects of spectrum exhaust in the U.S. mobile wireless industry. (2) Given the near total absence of fallow spectrum in the frequency bands useful for mobile broadband, satisfying the mobile wireless industry's appetite for spectrum will necessarily require a repurposing and reallocation of already-assigned spectrum. (3) While the National Broadband Plan identified some arguably low-hanging fruit, (4) the search for high-quality spectrum for commercial users continues. As a consequence, eyes are fixed on the federal government, whose agencies are assigned about half (1,687 MHz) of the "beachfront" spectrum between 225 MHz and 3.7 GHz. (5)

Although federal agencies need spectrum to carry out their mission-critical duties such as national defense and homeland security, public sector users have very weak incentives--if any--to use their spectrum efficiently. As one recent government-sponsored study concluded, "[federal users currently have no incentives to improve the efficiency with which they use their own spectrum allocation...." (6) Inefficiency in spectrum use implies that the same output could be produced using less of the scarce spectrum resource. Therefore, improving spectral efficiency in the public sector makes it possible to repurpose some government spectrum for commercial use while continuing to support essential public services. In light of the need for more spectrum resources in the commercial wireless sector, improving efficiency in the government's use and management of spectrum is a significant policy issue both in the United States and in other countries. (7) A number of studies have offered proposals aimed at increasing efficiency while continuing to meet the critical wireless communications needs of federal users.

The purpose of this Article is twofold. First, we turn to the standard production theory of economics to clarify what is normally meant by efficiency in the context of spectrum use. Using the same conceptual framework, prior studies, including several conducted by agencies of the U.S. government, have uniformly pointed to the efficiency of market outcomes as the gold standard for spectrum policy. Consequently, many of the proposals to improve the spectral efficiency of government users involve government agencies paying a market price, or a pseudo-market price, for the spectrum they use. Given our analysis, we are skeptical that such proposals--especially those calling for spectrum "markets" within the government--will ultimately lead to significant or long-term improvements in the public sector's efficiency in using its spectrum.

Second, we detail a theory of spectrum allocation across public and private users. In this model, we are not concerned with ways to improve the public sector's efficiency in its use of spectrum; rather, we address the questions of how government spectrum can be made available for commercial use, and how the government's inefficient management of spectrum influences the method of spectrum assignment. We envision two scenarios: (i) federal spectrum holdings continue to be managed by the government and leased to private sector users; or (ii) federal spectrum holdings are auctioned to and managed by the private sector for commercial uses.

Our model provides a number of policy-relevant findings. Among the more significant findings, we show that when all economic consequences are considered, the leasing of spectrum by the government for the production of private goods is less desirable than the auction of spectrum. The model also suggests that, under certain conditions, spectrum used by the government to produce public goods should be sold to the private sector and leased back to the government for the provision of public goods, in much the same way as the government buys other inputs from the private sector. Put bluntly, if the government is demonstrably incapable of managing and using spectrum resources efficiently--and most agree that this is historically the case--then it should not manage spectrum. Instead, if the goal of spectrum use and management is to enhance economic efficiency, then policymakers should expand the private sector's management of the nation's scarce spectrum resources, possibly including the management of spectrum used by federal agencies.

To be clear, we offer no specific mechanisms to improve the public sector's spectral efficiency, nor to transfer spectrum from the public to the private sector. As such, our analysis is not a panacea for spectrum policy; there is unlikely to be any single solution suitable for all spectrum bands and all public services. We do claim, however, that our approach carefully focuses attention on precisely those aspects of the spectrum allocation issue that must be understood in order for any reform effort to succeed. In essence, we take the contrarian position by arguing that the best solution to the government's inefficiency in spectrum use and management is neither "more" government nor a "more efficient" government, but rather the expansion of private sector management of the nation's scarce spectrum resources.

2. BACKGROUND

   Heightened attention to government spectrum reform was stimulated by the National Broadband Plan's call to make available for commercial use an additional 500 MHz of spectrum, some of which is expected to come from the repurposing of federally assigned spectrum. Subsequent to the Plan's release in 2010, the White House released a Presidential Memorandum on spectrum use to the heads of all executive departments and agencies. (8) The National Telecommunications and Information Administration ("NTIA") released at least two reports on spectrum repurposing to help meet this goal. (9) The President's Council of Advisors on Science and Technology ("PCAST") also released a report on the issue that calls for, among other things, the abandonment of identifying, clearing and auctioning government spectrum for commercial use, in favor of a government-managed spectrum commons in which spectrum is "leased" to private sector users. (10) In addition to these recent reports, the Government Accountability Office ("GAO") has published a number of studies on the topic over the past decade or so, all of which are somewhat to very critical of the government's management of spectrum. (11) Outside of government research, recent studies on the topic of federal spectrum reform have been released by, for example, the Mercatus Center at George Mason University, (12) Public Knowledge, (13) and the Technology Policy Institute ("TPI"). (14) And, as noted above, the effort to improve efficiency in the public sector's spectrum use is not just a domestic endeavor; the European Commission has recently sponsored a number of studies that offer conscientious examinations of public spectrum use and policy options. (15)

   With this flurry of recent attention, it is natural to think this issue is a new one. It is not. Some GAO studies on the topic are now over ten years old, (16) and President George W. Bush issued a Presidential Memorandum in May 2003 calling for a "Spectrum Policy Initiative" aimed at leading to the "development of legislative and other recommendations for improving spectrum management procedures and policies for the Federal Government and to address State, local and private spectrum uses." (17) Yet even these now-dated efforts seem recent when considering that a thorough investigation of federal spectrum use was initiated nearly a quarter-century ago by the NTIA in a proceeding that culminated in its 1991 Spectrum Report. (18) The NTIA's report was comprehensive and innovative, (19) calling for better spectrum accounting, improved databases, more spectrum sharing (e.g., cognitive radios), and injecting a heavy dose of market discipline into spectrum allocation and administration to drive public sector efficiency. For all practical purposes, recent studies on spectrum policy largely reiterate the findings and recommendations of the 1991 Spectrum Report. (One may go even further back to the seminal work by Ronald Coase from the early 1960s on spectrum allocation, though his writings were not focused exactly on the specific issues we address in this paper. (20))

   Dating from the NTIA's proceeding and report, the reform effort is now at least three decades old, yet, as the government admits, almost no progress has been made. As the GAO concluded in 2011, "[the] NTIA has been directed to conduct several projects focused on reforming government wide federal spectrum management and promoting efficiency among federal users of spectrum; however, its efforts in this area have resulted in limited progress toward improved spectrum management." (21) Similarly, the PCAST Report concludes, "[t]here is ... a...