Testimony of Peter K. Pitsch
Adjunct Fellow
The Progress & Freedom Foundation

July 27, 1995

It is an honor to have this opportunity to testify before this Committee on one of the most important telecommunications opportunities facing America--reforming our management of the electromagnetic spectrum. I do not come recently to this issue. I was in the thick of FCC deliberations on spectrum policy in the 1980s, first as Chief of the FCC's Office of Plans & Policy for Chairman Mark Fowler and second as Chief of Staff to Chairman Dennis Patrick. During those years I strongly espoused reforms that would give licensees more technical and operational control over how they use their spectrum and the use of auctions for initial assignments where there are mutually exclusive applications. Since then I have consulted for various telecom companies on spectrum and other FCC-related issues.

Most recently, I and several other analysts from a wide range of think tanks helped write The Progress & Freedom Foundation's report on the FCC, "The Telecom Revolution, An American Opportunity." In it, we recommended privatizing spectrum management.

The overarching goal in managing the electromagnetic spectrum should be to maximize its value to the American people. As in the rest of our economy, the best means of achieving efficient use of the spectrum is to rely principally on market forces. In my brief remarks today, I would like to catalog various types of failure systemic to the current centrally-planned, government-run spectrum regime, then identify the two ways in which spectrum reform can be achieved, and lastly spend a few moments discussing the tremendous importance of spectrum reform to America's economic and competitive prospects.

There are three fundamental problems with the current system. They span the 60-year history of the FCC and continue to this day. They are systemic. One, the FCC like other central planners lacks the information necessary to make efficient decisions. Two, the administrative process has been used by special interests to delay competition and innovation. Three, the current system has held fallow or underutilized a substantial portion of the spectrum for government purposes.

First, determining efficient use is a complex task requiring vast amounts of continually updated information that is hopelessly beyond the abilities of an administrative process. Markets, of course, "parallel-processes" information gathered by millions of businesses and consumers to continually provide price signals on the relative usefulness of the myriad competing demands and uses of spectrum. In the case of spectrum, the information required to make the necessary tradeoffs is greater than in most other areas of the economy, because the pace of technological development has created a raft of new uses for "wireless" communications and new ways in which spectrum can be efficiently deployed.

As a result, the FCC has consistently made simplistic and overly rigid decisions that misallocated spectrum, created inefficient industry structures, and locked in outdated technical standards. For example, in the 1950s the FCC dramatically underallocated spectrum to VHF television reducing the availability of television channels and impeding the development of a third, fourth and fifth national television network. In the 1970s it long delayed and then underallocated spectrum to cellular mobile telephony, creating only two cellular companies. This delay alone cost America $85 billion dollars. Time and again it imposed a nationwide grid that did not account for local differences--underallocating forestry spectrum in Idaho and overallocating it in New York City and vice versa for taxicab spectrum. Finally, the FCC locked in an analog technical standard for cellular telephony that was 20 years old and out of date by the time the FCC got around to assigning cellular licenses.

The second systemic failure of the current spectrum regime is its susceptibility to capture by special interests opposed to innovation and competition. In the face of political pressure, the FCC has again and again delayed the allocation of spectrum to innovative new services. Examples include Direct Broadcast Television, so called "wireless cable", low power TV, VHF drop ins, new FM channels, and satellite-delivered radio service to cars. Few companies and no trade association can resist the temptation to use the current regulatory scheme to disadvantage new competition or innovation. The sad reality is that in this "regulatory game", the established concentrated economic interests typically triumph over the amorphous and diffuse interests of consumers.

The FCC's public interest standard has been used as a weapon against consumers. Regulated companies frequently have embraced special public interest obligations in exchange for protection from competitors and innovation. This "taxation by regulation" by unelected regulators, followed by the inevitable quid pro quo, has been extremely costly to consumers. Any such deals should be made explicitly and only by Congress.

The third systemic failure of the current system of spectrum management is the underutilization of spectrum by the government sector. While there is some debate on how much spectrum is effectively denied to the private sector, there can be little doubt that it is in absolute terms a huge amount. Many governmental uses of spectrum are vital; others are not. All of these uses should be justified economically. Today government users of spectrum have access to spectrum at far less cost than that available to non government users. Recall that in the recent PCS auctions the winners paid over $7 billion for 60 MHz of PCS spectrum. The government has exclusive or "shared" access to thousands of MHz.

The simple solution to the current spectrum gridlock is to give existing and new spectrum users more operational and technical flexibility to use their spectrum the way they see fit so long as they do not interfere with their cochannel and adjacent channel "neighbors." The logic of this reform is easily illustrated. Typically, a licensee has two choices: (1) use his spectrum for a narrow purpose with the specific technology that the FCC has designated or (2) give it back to the FCC. Given this choice, the current spectrum use will be economic to the licensee as long as it has any positive value. In economic terms the "opportunity cost" of the spectrum to the licensee is zero. The cost to society, of course, is any foregone alternative use that is more valuable.

Once a licensee is given the freedom to use his spectrum for a broad range of uses, however, he has a strong economic incentive to consider the relative merits of alternative uses. The more flexibility he has the more likely it is that his use will be the highest and best use reflecting the spectrum's true opportunity cost to society.

In "The Telecom Revolution, An American Opportunity," the Progress & Freedom working group proposed a four-part plan to reform spectrum management. For brevity sake, this plan can be reduced to two mechanisms. First, the FCC should make unallocated private sector spectrum and underutilized government spectrum available to private users. The spectrum should be structured in highly flexible parcels with minimal government constraints. These parcels should give the legal protection and freedoms that attach to property, viz., technical and operational freedom, protection from trespass or unlawful takings, and the ability to assign, lease or sell. Of course, these new users should be subject to antitrust and other laws that apply to businesses generally. Where there are mutually exclusive bids for these new parcels, winners should be selected by auctions.

A few words about auctions are in order. They are the most efficient means of assigning licenses where there are mutually exclusive applicants for three reasons. First, they make assignments more quickly than administrative hearings and lotteries. A three-year delay imposed by comparative hearings or lotteries can easily wipe out a full one-fourth of the present value of the license. Second, they assign the spectrum to those who are most likely to put them to their highest valued use. Third, they make these assignments at less cost to society. Instead, of using scarce resources in expensive lotteries and comparative hearings, applicants compete by adding zeros to the size of the transfer payment they are willing to make to the government.

Note that the primary value of auctions is not that they raise money for the government. Care should be taken that auctions do not become an obstacle to the principal goal of reducing spectrum scarcity. Spectrum should be released as rapidly and efficiently as possible, even if that reduces the government's auction proceeds, because the goal is to free up spectrum for the benefit of the American economy. Where there are mutually exclusive applicants, however, auctions will be a highly efficient way to raise government funds.

The second way to achieve spectrum reform is to deregulate or privatize existing spectrum users. As with the newly allocated spectrum, the Congress should move to give existing users full flexibility to use their spectrum subject to interference and international treaty constraints. Licensees should be encouraged to negotiate with their "neighbors" to reach mutually beneficial agreements on possible new uses of their spectrum. This approach creates a private incentive to "reallocate" spectrum and take on the vested interests that can be counted to oppose new competition and innovation. Likewise, the government agencies should be encouraged to sell or sublease their spectrum to the private sector. I applaud Senator Steven's amendment to the Senate's telecom legislation that is designed to create such an incentive for government users to free up spectrum.

Those who see privatizing existing spectrum as a government "giveaway" miss the point. The existing users have for the most part purchased their spectrum in the resale market. It is not fair, efficient or politically feasible to require them to pay for their spectrum again. Furthermore, top down grants of flexible spectrum will be difficult because the existing users will collectively oppose the release of hundreds of MHz in flexible allocations. Privatizing existing spectrum will create a competition among existing licensees to move "beach front" spectrum from its current "land dump" uses. In this parlance, the current "beach property owners" may not appreciate these efforts, but they will not be able to stop them. Indeed, they might well choose to join them. In the end, America's "beach-consuming public" will benefit.

It should be noted that these approaches do not require all or nothing. You can do them in degree. In fact the Commission, under Chairmen Fowler, Patrick, Sikes and Hundt, has increasingly utilized the concepts of flexibility and privatization. Working within the limits of the administrative process and the current law has been a difficult task and they and their fellow commissioners and many key staffers deserve credit for what they have done.

The time has come, however, for Congress to dramatically speed up this process. A centrally- planned, government-run allocation system probably never made sense. It has cost Americans billions of dollars in foregone wealth and prosperity, but the accelerating pace of technical change and the increasing complexity of the spectrum allocation decisions that have to be made make the case for dramatic reform more compelling than ever before.

We are all familiar with the rapid change in the computer industry. In the space of seven years, IBM lost roughly $70 billion dollars of market capitalization. In the same period, many small hardware and software companies grew exponentially, more than offsetting those mainframe losses. Who can seriously question that if Apple, Intel, Compaq and Microsoft had required FCC spectrum to get to the market that the personal computer revolution would have been postponed?

In the same way, spectrum gridlock is a primary obstacle to the full exploitation of the computer revolution. Few things will promote wireless computer applications and local telephone competition as much as driving down the cost of spectrum by several orders of magnitude. Fundamental spectrum reform would build on the U.S.'s current but perishable lead in the global digital derby. America is positioned to leave other countries in a cloud of silicon dust. A regulatory framework that slows innovation in this area, despite any plausible shortrun efficiency gains it might achieve, will foreclose a tremendous opportunity for the American people.