Incentive Auction Poses Problems that Won’t Be Easy to Solve, McDowell Says

McDowell told Communications Daily he remains concerned about the incentive auction. “The fundamental concern I have is that the commission might be poised to make the auction process and structure far too complicated,” he said. “History teaches us that if auctions are simple they're more successful. We can look at the C-block and D-block at 700 MHz. That’s where the commission tried to get smarter than the marketplace and we saw failures there as a result.”

The 700 MHz C-block, a nationwide license bought by Verizon Wireless, came complete with early open-access rules. The FCC tried to launch a national wireless network for public safety through rules tied to the D-block during the 700 MHz auction, but that plan fell through when no one bid. “Sometimes in policymaking there are those who think that the more complex it is the smarter it makes everyone look, but, in reality, what time and time again proves more fruitful is just to keep it simple,” McDowell said.

Without mentioning him by name, McDowell indicated he’s very hopeful about the policies that will be pursued by Tom Wheeler, President Barack Obama’s nominee to replace Genachowski as chairman. Wheeler is the former president of CTIA with decades of experience in wireless. “We will have a new chairman who certainly understands that wireless marketplace and another new Republican commissioner, so it is my hope that once all the ideas are aired out that the FCC will make it a simple process that will yield the most spectrum for the marketplace to consumers and it will yield more revenues for the Treasury, which is what Congress intended, in part for deficit reduction but also in part for the buildout of FirstNet,” he said.

McDowell flagged one part of the FCC’s proposed rules for an incentive auction -- the plan to hold both the reverse auction of broadcast spectrum and a forward auction of spectrum licenses to wireless providers simultaneously. McDowell said he has met with both broadcasters and wireless providers. “The idea of a simultaneous auction creates a lot of uncertainty … on both sides, the sellers and the buyers,” he said. “My mind would be still open in terms of the game theory behind the simultaneous auction, but it leaves both sides of the transaction with less information to make some crucial decisions and it would be very reliant upon software and systems to get it right."

The reconstituted FCC under Wheeler may decide to simplify the structure for the auction, McDowell predicted. “I think there would be support among current commissioners for a simpler auction structure because there’s going to be a concern regarding how much money we're raising for FirstNet and also a concern from other offices regarding how regulatory the rules could be,” he said. But at the same time, he said, the transition at the FCC to new leadership will inevitably mean delays in developing auction rules. “Keep in mind while the team working on the incentive auction is highly qualified and working very hard that ultimately it’s the commission who will have ownership over the order, so there could be a great deal of change from what’s being discussed now by staff,” he said. “It could be that staff presents the new chairman with a plan or a variety of plans in the form of an options memo and the new chair could pick among those, or scrap all the ideas and start over, or pick some hybrid of that.”

When the incentive auction will start remains uncertain, McDowell said. Genachowski has urged a 2014 auction. “If the new chair doesn’t get installed until the third or fourth quarter of this year, probably third quarter, then he’s not going to want to issue an order within his first month or two of being here, I don’t think, so an order or series of orders might not happen until the very end of this year, or early next year, at the earliest,” he said. “It’s conceivable you could start an auction in late 2014 still. But keep in mind, I think we've only seen the tip of the iceberg in terms of surprises."

History shows the FCC needs to expect the unexpected, McDowell said. “In 2007 we actually had industry asking us to delay the 700 MHz auction because some key players were still digesting AWS-1” spectrum, he said. “You just don’t know what contingencies would pop up. It would be that there aren’t enough broadcasters that are genuinely interested based on the direction they think the FCC is going in, in which maybe the FCC would have to go back [to the] drawing board in order to entice more broadcasters to participate. Or there could be other unforeseen economic development or business development in general that delays it, or a political development.”

McDowell has similar concerns about media ownership. “I'm not satisfied with where media ownership has been moving,” he said. “This has been a very slow moving boat. In fact it may be stalled. We owe it to Congress, who directed us to review our rules and come out with an order every four years under Section 202(h), to get on with this. We also owe it to the 3rd [U.S.] Circuit [Court of Appeals] to get on it. We probably should have done … studies years ago. But they're still not really under way.” Revising media ownership rules offers many potential benefits, McDowell said. “There’s a lot more that can be done,” he said. “There’s a lot more that can be done to take regulation off the backs of traditional media companies in the face of unprecedented competition from new media. There’s more that can be done, I think, in that context to try to find ways to promote diversity."

McDowell leaves generally pleased with the FCC’s work on reshaping the USF, though he wishes the FCC had also been able to wrap up more that distribution reform. “On the one hand, I really am proud of, despite the commission having a 3-1 partisan divide, in October of 2011 we were able to agree on the first federal entitlement reform in a generation,” he said. “At the same time, I think we missed an opportunity to address contribution reform, which, as I said all along, should have been done at the same time as distribution reform.”

Contribution reform is inherently more “dicey” politically because “if you're broadening the base of contributors it means someone who is not paying now will be paying later,” McDowell said. “But something needed to be done to keep the income for the fund sustainable. At the same time, our reforms did put in a lot of spending controls and that, I think, has helped stabilize the contribution factor. So that has kicked the contribution reform can down the road. There isn’t as much as urgent need because we don’t see the trend of it spiking continuing, in fact, it has declined a little bit in recent months. That will probably continue for about two more years as we strip Lifeline duplicates from the rolls and things such as that."

In 2017, the USF High Cost Fund is due for review and there is no budget on Lifeline, McDowell said. “We have a lot of pressure groups out there, advocacy groups, that are calling for even more people to be added to the Lifeline rolls, so that has the potential to be a spending nightmare, a fiscal train wreck, and there’s more work that needs to be done.” But he also said the commission and staff deserve credit for the changes made so far. “Chairman Genachowski took a big risk,” he said. “It was, I think, as fiscally prudent as possible given the partisan divide."

McDowell said he felt it was time to move on, but still does so with some regret. “I think I'm going to look back at this job when I'm an old man and say this was the best job that I've ever had,” he said.

"This is a great job because I love the issues,” McDowell said. “The structure of how the job of being a commissioner is set up gives you an incredible amount of independence. You have the independence of being a federal judge in a lot of ways, but you're also a policymaker. While the president appoints us, he can’t fire us. Congress oversees us and their insight is very valuable, but at the end of the day it’s five people, or sometimes fewer, who make crucial decisions regarding about one-sixth of our economy. You can get a lot done more quickly than in Congress, all within the bounds of the statute of course, but we can move more quickly than Congress on complex issues. And if you follow the facts and the law and can find consensus in policy outcomes, really a lot can be accomplished that fundamentally affects the daily lives of not just Americans but people around the globe.”