My UK friends at the PolicyTracker spectrum newsletter have kindly given permission to reprint the following recent article from their publication. The author is an American living in UK who often writes for them on broadcasting spectrum issues.

It is ironic that a National Broadband Plan insider told me that the first draft of NBP included a similar discussion. But so impressive are the powers of the broadcast interests and so “captured” is the FCC, as are many other regulatory agencies, that within 30 minutes of the release of the first NBP draft to the FCC Media Bureau the Chairman’s Office started getting calls from the Hill objecting to this approach.

Wow! That’s raw political power and regulatory capture! NAB - real impressive. CTIA may still have at the moment the inside track on the 8th Floor, but don’t count out the broadcasters with their decades of experience with playing power games.

(Of course, one might also want to address why there is such regulatory capture and start countermeasures, but I doubt anyone at FCC wants to address that issue. I believe that an active program of job rotation by career civil servants would be a major step to deter such capture. But there has never been interest on the 8th Floor in such an approach since the focus is always on near term gains not long term benefits and rotations would have near term costs.)

US broadcasters have no property rights in spectrum,
says academic research:
The work claims the legal status of broadcasting spectrum is as clear as mud
but incentive auctions are a wayof sidestepping the problem
by Dugie Standeford
© PT Publishing 2012 Tel: +44 (0)20 7100 2875
Reprinted by permission

Legal claims to property rights in spectrum are “highly tenuous” and would likely allow the US government to reclaim the spectrum without compensation

The US Spectrum Act authorising “reverse” and incentive auctions gives broadcasters the option of handing back their 6 MHz licences, relinquishing spectrum and sharing their TV channel with other licencees, or moving from a UHF to a VHF channel. In the reverse auction phase, broadcast TV licensees will be able to bid to voluntarily give up spectrum usage rights in exchange for payments. But one vexing, and still unresolved, question – on which the Federal Communications Commission (FCC) is now seeking comment – is how to determine how much winners of the reverse auction should receive.

Two academic papers by financial analyst Armand Musey, founder of Summit Ridge Group LLC, explore possible property rights broadcasters may have in the spectrum they hold and legal bases on which the government could reallocate the spectrum and assess compensation.

One article, “How the Traditional Property Rights Model Informs the Broadcast Television Spectrum Rationalization Challenge,” appeared in the Spring 2012 Hastings Communication and Entertainment Law Journal. The second, “Broadcasting Licenses: Ownership Rights and the Spectrum Rationalization Challenge,” is in the Spring 2012 issue of the Columbia Science and Technology Law Review. Musey's research focuses on telecom and media regulation with an emphasis on how regulatory policy affects business models and public welfare, and he's particularly interested in wireless spectrum valuation, he said.

The National Association of Broadcasters would not discuss the specifics of the property rights question. But Dennis Wharton, executive vice president, communications, told PolicyTracker that the premise that broadband is somehow a higher and better use of spectrum than broadcasting “is fundamentally flawed.” Musey's research doesn't acknowledge that broadcasting's “one-to-everyone” transmission architecture is far more efficient that the inefficient “one-to-one” architecture of cellphones and the Internet, he said. “The reality is that broadcast and broadband are complementary services, and the government ought not be in the business of favouring one over the other,” he said in an email.

Broadcasters' legal claim

Legal claims to property rights in spectrum are “highly tenuous” and would likely allow the US government to reclaim the spectrum without compensation when broadcast licences expire, Musey wrote in the Hastings article. But the fact that the US has made the reverse auction voluntary, and that it won't force broadcasters to relinquish spectrum, shows that it “is essentially recognizing even greater possession rights for the broadcasters than owners of private property traditionally enjoy,” he said.

There is inherent tension” between the 1934 act, which says spectrum licence holders have no property rights, and the “seeming implicit guarantees of renewal and increased ability to transfer” in later law

But claims that FCC licences confer property rights are weak, the Columbia article argued. Broadcasters' right to control their spectrum are set out in the Communications Act of 1934 and the Telecommunications Act of 1996. Analysed according to their text and relevant legislative history, those measures indicate that broadcasters don't have a claim to property rights that would entitle them to payment for non-renewal of their licences, Musey said. But if one considers how the laws have been applied in some situations, broadcasters may have some “legitimate (and growing)” expectation of property rights, he said.

One area where those rights might be implicated is in the fact that all FCC licence holders expect their licences to be renewed automatically unless they egregiously violate the terms, Musey wrote. Moreover, broadcasters' increased ability to transfer licences suggests they may have some property rights in them. All this is countered, however, by other language in the 1996 act that lets the FCC change a broadcaster's rights upon renewal by, say, reducing the current spectrum allocation of 6 MHz or moving it to a less desirable part of the band. The fact that the regulator has the discretion to make such changes signals that the government still has significant control over the spectrum, he said.

“There is inherent tension” between the text of the 1934 act, which says that spectrum licence holders have no property rights, and the “seeming implicit guarantees of renewal and increased ability to transfer” in the later law, Musey wrote. While 60 years of FCC and congressional policy decisions seem to give broadcasters some expectation of property rights in their licences, however, the fact that Congress has never amended the provision that states explicitly that no such property rights exist makes it likely that any claim for property rights would fail, he said. And even if broadcasters did have some rights in the spectrum and were entitled to compensation for non-renewal, they wouldn't be entitled to payment for any increased value arising from the government's future use and/or need of the spectrum for higher-value, mobile broadband applications, he said.

A need to “fudge”

For practical and political reasons, the most expedient solution to reallocating TV spectrum is for the government to negotiate a price to buy out broadcasters that is more generous than the minimal legal compensation required to give them due process, Musey wrote. But it will be hard for the government to legally justify such a payment without facing claims of waste of government assets; and, conversely, it would be difficult to maximise the value of future FCC auctions to motivate licencees to invest in advanced services on their spectrum if the FCC has a policy of depriving licencees of their expected licence rights, he said. Finding a solution is a challenge, he said.

Maybe that's why the FCC and Congress decided to “fudge” the issue by settling on the idea of a voluntary incentive auction, Musey said. The Spectrum Act requires the regulator to base the incentive auction price on the result of a reverse auction to determine broadcasters' asking price for relinquishing their spectrum. That payment will likely reflect a discount to the market value of the spectrum to its higher-value use but also perhaps be slightly higher than its current use value, he said. The “stick” to encourage broadcasters to participate in the voluntary process is the FCC's argument that it can modify the licences at any time, and the implicit threat to take the spectrum away, he said. While the Spectrum Act prevents the FCC from doing that during the auction process, it could do so after the auction to clear spectrum in problem markets with holdout broadcasters, he said.

'Politically influenced” higher payment best?

Treating spectrum rights as having elements of private property prompts questions about how the government will pay broadcasters for the loss of their rights, Musey wrote. If the FCC can't reach a voluntary settlement with broadcasters, it could try to seize the spectrum under “eminent domain” principles, he said. Under that approach, the government, under the Takings Clause of the US Constitution, would buy licences at the fair market value of the loss it causes a broadcaster's current business.

Eminent domain law prevents payments based on the increase in value of the property for the government's higher-value intended future use, but the political pressures surrounding the incentive auction could push the government to sweeten the offer beyond the current market value of TV broadcast use, Musey wrote. In fact, offering a sum that exceeds market value “may be the most expeditious solution” to shifting broadcasters off the spectrum, he said.

Can the analysis help broadcasters set reverse auction prices?

Asked if his approach could help broadcasters come up with prices for the reverse auction, Musey said, “Yes and no.” Broadcasters can set their fees, but the FCC will decide which bids to accept, he said. If the regulator decides the prices are too high, or not enough broadcasters submit bids in the market where the FCC wants spectrum, “we are back to square one with the government theoretically having the ability to not renew the licenses,” he said.

The FCC's “not so subtle message” to broadcasters is, “We are going to get this spectrum one way or another and if you don't submit sufficient[ly] reasonable bids and we have to pry it away later, it will be on much less attractive terms,” Musey said. There is very much a negotiation over what is reasonable, he said. The FCC must also try not to apply too much pressure and undermine the success of later auctions, or deter other current and future licencees from investing in new services out of concern over the stability of their spectrum licences, he said.•

Tags: broadcasting, NBP