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Spectrum Auction Deal May Haunt Congress

It is always possible that Congress will do many more productive things before November. God knows there are plenty of items on the agenda.

Perhaps a new and improved transportation bill — actually any bill other than the House version would be improved — will emerge that can keep the economy moving and improve our highways and transit system. Perhaps we will make progress on fiscal policy, inching toward the broad agreement that eluded the super committee. Perhaps we will at least find sensible ways to avoid the sequesters — perhaps some revenue instead of defense cuts? Nah.

It is more likely that the biggest accomplishment of the year was the deal to extend the payroll tax cut, unemployment benefits and the “doc fix.” That deal was not easy, of course. There was a long impasse, as President Barack Obama demanded that the payroll tax cut be paid for by a tax on the highest earners and Republicans demanded offsets in other domestic programs. That was followed by Republicans saying they would not require offsets for the payroll tax cut and then a short burst of intense negotiations behind closed doors over how to pay for the rest of the initiatives. And then victory — largely through a plan to apply revenues from spectrum auctions.

The plan swept through Congress with impressive bipartisan margins. The press largely reported it as Congress framed it, without looking seriously at what the deal entailed. A closer look shows how dangerous it is to let lawmakers throw something together without any serious deliberation or scrutiny.

Start with the conditions for conducting auctions of spectrum to create new wireless capacity. House Republicans insisted on statutory language that has broken the hugely successful spectrum auction authorization first effected in 1993 and also delayed for many years any possibility that digital broadcast spectrum that is almost entirely unused can be repurposed to serve the growing demands for wireless broadband.

Back in the early 1990s, the wireless phone market in each local area had two competitors, commonly including the local Bell company. The Federal Communications Commission, with Congressional authorization, sold new licenses in each market but opened them up to new firms who did not already participate in the duopoly. The result was an explosion of real competition, with four or five firms, sometimes more, in each market. This new competition resulted in the dramatic expansion of wireless usage, new devices and the innovation (and jobs) that followed — not to mention lower prices for all of us.

No more. Thanks to AT&T, which was rebounding from the denial of its attempt to acquire T-Mobile, and with the active connivance of Verizon and broadcasters, the House majority wrote into the payroll tax deal a prohibition on the FCC setting any conditions for bidder eligibility in auction. So, unlike in 1994, one firm can buy all the spectrum up for auction. The House majority gave erstwhile monopolists a guarantee that they can participate in the auctions to expand their monopoly power.

Of course, it is possible that this system will maximize revenues for the government and thus relieve the burden of taxpayers, a bonus to offset the likely expansion of monopoly power.

But the experience of other countries, including Germany and Switzerland, suggests the opposite. There, the imposing power of the biggest companies scared off others from bidding for the top-quality spectrum, enabling the big players to buy the airwaves at bargain-basement prices, splitting the bounty even as they expanded their monopoly or duopoly power and leaving taxpayers in their countries with far less revenue then expected.

Rep. Henry Waxman (Calif.), top Democrat on the Energy and Commerce Committee, was almost alone in raising questions about this provision. He was able, with the help of Senate Majority Leader Harry Reid (D-Nev.), to get an offsetting amendment stating that the FCC can have a “generally applicable” rule about total permissible spectrum ownership. But reconciling that rule with the prohibition on auction conditions will be nearly impossible, ensuring protracted FCC proceedings and court challenges. Second, the House Republicans also instructed the FCC not to grant unlicensed spectrum — free spectrum any startup can use. Unlicensed spectrum is what we have all come to call Wi-Fi — the way most computers connect to the Internet in offices and homes. Wonder why you don’t have to pay a cellular company for most Wi-Fi? It’s because the FCC didn’t auction that spectrum to the companies but makes it available for free.

Thousands of devices are designed to use unlicensed spectrum. American technology leaders begged Congress not to deny this bargain for consumers. What they got was a limit on the FCC’s discretion so that only guard bands, historically very narrow spectrum separations to preclude interference, can be unlicensed.

Third, Congress gave another big wet kiss to broadcasters, who will be able to hold onto their extremely valuable public airwaves even longer and through the auction rules are set to get a much larger share of the proceeds than taxpayers. Indeed, as scholar James Snider has pointed out, it is possible that the revenue for taxpayers from these valuable spectrum licenses will be miniscule, while broadcasters will make out like bandits.

Most Members of Congress have no idea what was in the fine print of this compromise. If House Republicans were the drivers here, plenty of Democrats went along for the ride.

The stupefying details of how to conduct complicated auctions and the technical complexity of spectrum bands and their divisions and uses are tough for even experts to sort out.

The big players, including in the White House, were happy to get a deal extending the payroll tax cut and are content to declare victory and move on. But as time passes, the deal’s downside will become more apparent, underscoring how the near-complete breakdown in regular order can lead to things such as this.

Norman Ornstein is a resident scholar at the American Enterprise Institute.

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