156-162 MHz Public Coast Station Spectrum Auction Scheduled for December 3, 1998; Comment Sought on Reserve Prices or Minimum Opening Bids and Other Auction Procedural Issues

FEDERAL COMMUNICATIONS COMMISSION

[DA 98-1469; Report No. AUC-98-20-A (Auction No. 20)]

156-162 MHz Public Coast Station Spectrum Auction Scheduled for

December 3, 1998; Comment Sought on Reserve Prices or Minimum Opening

Bids and Other Auction Procedural Issues

AGENCY: Federal Communications Commission.

ACTION: Notice seeking comment.

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SUMMARY: The Commission announces the auction of 42 VHF public coast

station licenses scheduled for December 3, 1998, and seeks comment on a

proposed formula for calculating minimum opening bids and other auction

procedural issues.

DATES: Comments are due on or before August 14, 1998. Reply comments

are due on or before August 21, 1998.

ADDRESSES: To file formally, parties must submit an original and four

copies to the Office of the Secretary, Federal Communications

Commission, Room 222, 1919 M Street N.W., Washington, D.C. 20554. In

addition, parties must submit one copy to Amy Zoslov, Chief, Auctions

and Industry Analysis Division, Wireless Telecommunications Bureau,

Federal Communications Commission, Room 5202, 2025 M Street N.W.,

Washington, D.C. 20554. Comments and reply comments will be available

for public inspection during regular business hours in the FCC Public

Reference Room, Room 239, 1919 M Street N.W., Washington, D.C. 20554.

FOR FURTHER INFORMATION CONTACT: Bob Reagle, Jeff Garretson, or Anne

Napoli, Auctions and Industry Analysis Division, Wireless

Telecommunications Bureau, at (202) 418-0660.

SUPPLEMENTARY INFORMATION: This public notice was released on July 23,

1998 and is available in its entirety for inspection and copying during

normal business hours in the FCC Reference Center (Room 239), 1919 M

Street, N.W., Washington, D.C., and also may be purchased from the

Commission's copy contractor, International Transcription Services,

(202) 857-3800, fax (202) 857-3805, 1231 20th Street, N.W., Washington,

D.C. 20036.

Synopsis of the Public Notice

1. By this Public Notice, the Wireless Telecommunications Bureau

(``the Bureau'') announces the auction of 42 VHF public coast station

licenses, to begin on December 3, 1998. These licenses encompass the

United States, the Northern Mariana Islands, Guam, American Samoa, the

United States Virgin Islands and Puerto Rico. Specifically, one license

will be available in each of 42 geographic areas known as VHF Public

Coast Areas (VPCs). There are two categories of VPCs, maritime VPCs and

inland VPCs. Maritime VPCs, of which there are nine, are roughly

equivalent to U.S. Coast Guard Districts, and include geographic areas

any part of which is within 100 miles of a major waterway. Inland VPCs,

of which there are 33, are smaller geographic areas identical to the

Commerce Department's Economic Areas, no part of which is within 100

miles of a major waterway.

2. Future public notices will include further details regarding

application filing and payment deadlines, seminars, and other pertinent

information. In this Public Notice, the Commission seeks comment on

procedural issues relating to the VHF public coast station auction.

I. Reserve Price or Minimum Opening Bid

3. The Balanced Budget Act of 1997 calls upon the Commission to

prescribe methods by which a reasonable reserve price will be required

or a minimum opening bid established when FCC licenses are subject to

auction (i.e., because they are mutually exclusive), unless the

Commission determines that a reserve price or minimum bid is not in the

public interest. Consistent with this mandate, the Commission has

directed the Bureau to seek comment on the use of a minimum opening bid

and/or reserve price prior to the start of each auction. The Bureau was

directed to seek comment on the methodology to be employed in

establishing each of these mechanisms. Among other factors the Bureau

should consider is the amount of spectrum being auctioned, levels of

incumbency, the availability of technology to provide service, the size

of the geographic service areas, issues of interference with other

spectrum bands, and any other relevant factors that reasonably could

have an impact on valuation of the spectrum being auctioned. The

Commission concluded that the Bureau should have the discretion to

employ either or both of these mechanisms for future auctions.

4. Normally, a reserve price is an absolute minimum price below

which an item will not be sold in a given auction. Reserve prices can

be either published or unpublished. A minimum opening bid, on the other

hand, is the minimum bid price set at the beginning of the auction

below which no bids are accepted. It is generally used to accelerate

the competitive bidding process. Also, in a minimum opening bid

scenario, the auctioneer generally has the discretion to lower the

amount later in the auction.

5, In anticipation of this auction and in light of the Balanced

Budget Act, the Bureau proposes to establish minimum opening bids for

the VHF public coast station auction, and retain discretion to lower

the minimum opening bids. The Bureau believes a minimum opening bid,

which has been utilized in other auctions, is an effective bidding

tool. A minimum opening bid, rather than a reserve price, will help to

regulate the pace of the auction and provides flexibility.

6. Specifically, the Commission proposes the following formula for

calculating minimum opening bids on a license-by-license basis in

Auction No. 20:

a. Maritime VPC Licenses: $.001 * MHz * Pop (rounded up to the

nearest dollar) with a minimum of no less than $2,500 per license.

b. Inland VPC Licenses: $.011 * MHz * Pop (rounded up to the

nearest dollar) with a minimum of no less than $2,500 per license.

Comment is sought on this proposal. If commenters believe that the

formula proposed above for minimum opening bids will result in

substantial numbers of unsold licenses, or is not a reasonable amount,

or should instead operate as a reserve price, they should explain why

this is so, and comment on the desirability of an alternative approach.

Commenters are advised to support their claims with valuation analyses

and suggested reserve prices or minimum opening bid levels or formulas.

In establishing the formula for minimum opening bids, the Commission

particularly seeks comment on such factors as, among other things, the

amount of spectrum being auctioned, levels of incumbency, the

availability of technology to provide service, the size of the

geographic service areas, issues of interference with other spectrum

bands and any other relevant factors that could reasonably have an

impact on valuation of the VHF public coast station spectrum.

Alternatively, comment is sought on whether, consistent with the

Balanced Budget Act, the public interest would be served by having no

minimum opening bid or reserve price.

II. Other Auction Procedural Issues

7. The Balanced Budget Act of 1997 requires the Commission to

``ensure that, in the scheduling of any competitive bidding under this

subsection, an adequate period is allowed * * * before issuance of

bidding rules, to permit notice and

[[Page 40907]]

comment on proposed auction procedures * * *'' Consistent with the

provisions of the Balanced Budget Act and to ensure that potential

bidders have adequate time to familiarize themselves with the specific

provisions that will govern the day-to-day conduct of an auction, the

Commission directed the Bureau, under its existing delegated authority,

to seek comment on a variety of auction-specific issues prior to the

start of each auction. The Commission therefore seeks comment on the

following issues.

A. Auction Sequence and License Groupings

8. Because it is most administratively appropriate, and allows

bidders to take advantage of any synergies that exist among licenses,

we propose to award the 42 VHF public coast station licenses in a

single, simultaneous multiple-round auction. The Commission seeks

comment on this proposal.

B. Structure of Bidding Rounds, Activity Requirements, and Criteria for

Determining Reductions in Eligibility

9. The Commission proposes to divide the auction into three stages:

Stage One, Stage Two and Stage Three. The auction will start in Stage

One. The Commission proposes that the auction will generally advance to

the next stage (i.e., from Stage One to Stage Two, and from Stage Two

to Stage Three) when the auction activity level, as measured by the

percentage of bidding units receiving new high bids, is below ten

percent for three consecutive rounds of bidding in each Stage. However,

the Commission further proposes that the Bureau retain the discretion

to change stages unilaterally by announcement during the auction. In

exercising this discretion, the Bureau will consider a variety of

measures of bidder activity including, but not limited to, the auction

activity level, the percentages of licenses (as measured in bidding

units) on which there are new bids, the number of new bids, and the

percentage increase in revenue. The Commission seeks comment on these

proposals.

10. In order to ensure that the auction closes within a reasonable

period of time, an activity rule requires bidders to bid actively on a

percentage of their maximum bidding eligibility during each round of

the auction rather than waiting until the end to participate. A bidder

that does not satisfy the activity rule will either lose bidding

eligibility in the next round or use an activity rule waiver.

11. For the VHF public coast station auction, the Commission

proposes that, in each round of Stage One of the auction, a bidder

desiring to maintain its current eligibility is required to be active

on licenses encompassing at least 60 percent of its current bidding

eligibility. Failure to maintain the requisite activity level will

result in a reduction in the bidder's bidding eligibility in the next

round of bidding (unless an activity rule waiver is used). During Stage

One, reduced eligibility for the next round will be calculated by

multiplying the current round activity by five-thirds (5/3). In each

round of the second stage of the auction, a bidder desiring to maintain

its current eligibility is required to be active on at least 80 percent

of its current bidding eligibility. During Stage Two, reduced

eligibility for the next round will be calculated by multiplying the

current round activity by five-fourths (5/4). In each round of Stage

Three, a bidder desiring to maintain its current eligibility is

required to be active on 98 percent of its current bidding eligibility.

In this final stage, reduced eligibility for the next round will be

calculated by multiplying the current round activity by fifty forty-

ninths (50/49). The Commission seeks comment on these proposals.

C. Minimum Accepted Bids

12. Once there is a standing high bid on a license, a bid increment

will be applied to that license to establish a minimum acceptable bid

for the following round. For the VHF public coast station auction, the

Commission proposes, as described immediately below, to use an

exponential smoothing methodology to calculate minimum bid increments.

The Bureau retains the discretion to change the minimum bid increment

if it determines that circumstances so dictate. The exponential

smoothing methodology has been used in previous auctions, including the

LMDS auction, and will be used in the upcoming 220 MHz auction. The

Commission seeks comment on this proposal.

Exponential Smoothing

13. The exponential smoothing formula calculates the bid increment

based on a weighted average of the activity received on each license in

the current and all previous rounds. This methodology will tailor the

bid increment for each license based on activity, rather than setting a

global increment for all licenses. For every license that receives a

bid, the bid increment for the next round for that license will be

established as a percentage increment that is determined using the

exponential smoothing formula.

14. Using exponential smoothing, the calculation of the percentage

bid increment for each license will be based on an activity index,

which is calculated as the weighted average of the current activity and

the activity index from the previous round. The activity index at the

start of the auction (round 0) will be set at 0. The current activity

index is equal to a weighting factor times the number of new bids

received on the license in the current bidding period plus one minus

the weighting factor times the activity index from the previous round.

The activity index is then used to calculate a percentage increment by

multiplying a minimum percentage increment by one plus the activity

index with that result being subject to a maximum percentage increment.

The Commission will initially set the weighting factor at 0.5, the

minimum percentage increment at 0.1, and the maximum percentage

increment at 0.2.

Equations

Ai = (C * Bi) + ( (1-C) * Ai-1)

Ii = smaller of ( (1 + Ai) * N) and M

Where,

Ai = activity index for the current round (round i)

C = activity weight factor

Bi = number of bids in the current round (round i)

Ai-1 = activity index from previous round (round i-1),

A0 is 0

Ii = percentage bid increment for the current round (round

i)

N = minimum percentage increment

M = maximum percentage increment

Under the exponential smoothing methodology, once a bid has been

received on a license, the minimum acceptable bid for that license in

the following round will be the new high bid plus the dollar amount

associated with the percentage increment (variable Ii from

above times the high bid). This result will be rounded to the nearest

thousand if it is over 10,000 or to the nearest hundred if it is under

10,000.

Examples

License 1

C=0.5, N = 0.1, M = 0.2

Round 1 (2 new bids, high bid = $1,000,000)

a. Calculation of percentage increment using exponential smoothing:

A1 = (0.5 * 2) + (0.5 * 0) = 1

The smaller of I1 = (1 + 1) * 0.1 = 0.2 or 0.2 (the

maximum percentage increment)

b. Minimum bid increment using the percentage increment

(I1 from above)

0.2 * $1,000,000 = $200,000

c. Minimum acceptable bid for round 2 = 1,200,000

[[Page 40908]]

Round 2 (3 new bids, high bid = 2,000,000)

a. Calculation of percentage increment using exponential smoothing:

A2 = (0.5 * 3) + (0.5 * 0) = 1.5

The smaller of I2 = (1 + 1.5) * 0.1 = 0.25 or 0.2

(the maximum percentage increment)

b. Minimum bid increment using the percentage increment is

(I2 from above)

0.2 * $2,000,000 = $400,000

c. Minimum acceptable bid for round 3 = 2,400,000

Round 3 (1 new bid, high bid = 2,400,000)

a. Calculation of percentage increment using exponential smoothing:

A3 = (0.5 * 1) + (0.5 * 0.5) = 0.75

The smaller of I3 = (1 + .75) * 0.1 = 0.175 or 0.2

(the maximum percentage increment)

b. Minimum bid increment using the percentage increment

(I3 from above)

0.175 * $2,400,000 = $420,000

c. Minimum acceptable bid for round 4 = 2,820,000

D. Initial Maximum Eligibility for Each Bidder

15. The Bureau has delegated authority and discretion to determine

an appropriate upfront payment for each license being auctioned, taking

into account such factors as the population in each geographic license

area, and the value of similar spectrum. With these guidelines in mind,

the Commission proposes to calculate upfront payments on a license-by-

license basis for maritime VPC licenses and inland VPC licenses using

the following formulae:

a. Maritime VPC Licenses: $.0007 * MHz * Pop (rounded up to the

nearest dollar) with a minimum upfront payment of $2,500 per license.

b. Inland VPC Licenses: $.0075 * MHz * Pop (rounded up to the

nearest dollar) with a minimum upfront payment of $2,500 per license.

The Commission seeks comment on these proposals.

16. The Commission further proposes that the amount of the upfront

payment submitted by a bidder will determine the initial maximum

eligibility (as measured in bidding units) for each bidder. Upfront

payments will not be attributed to specific licenses, but instead will

be translated into bidding units to define a bidder's initial maximum

eligibility, which cannot be increased during the auction. Thus, in

calculating the upfront payment amount, an applicant must determine the

maximum number of bidding units it may wish to bid on (or hold high

bids on) in any single round, and submit an upfront payment covering

that number of bidding units. The Commission seeks comment on this

proposal.

E. Activity Rule Waivers and Reducing Eligibility

17. Use of an activity rule waiver preserves the bidder's current

bidding eligibility despite the bidder's activity in the current round

being below the required minimum level. An activity rule waiver applies

to an entire round of bidding and not to a particular license. Activity

waivers are principally a mechanism for auction participants to avoid

the loss of auction eligibility in the event that exigent circumstances

prevent them from placing a bid in a particular round.

18. The FCC auction system assumes that bidders with insufficient

activity would prefer to use an activity rule waiver (if available)

rather than lose bidding eligibility. Therefore, the system will

automatically apply a waiver (known as an ``automatic waiver'') at the

end of any bidding period where a bidder's activity level is below the

minimum required unless: (1) there are no activity rule waivers

available; or (2) the bidder overrides the automatic application of a

waiver by reducing eligibility thereby meeting the minimum

requirements.

19. A bidder with insufficient activity that wants to reduce its

bidding eligibility rather than use an activity rule waiver must

affirmatively override the automatic waiver mechanism during the

bidding period by using the reduce eligibility function in the

software. In this case, the bidder's eligibility is permanently reduced

to bring the bidder into compliance with the activity rules as

described above. Once eligibility has been reduced, a bidder will not

be permitted to regain its lost bidding eligibility.

20. A bidder may proactively use an activity rule waiver as a means

to keep the auction open without placing a bid. If a bidder submits a

proactive waiver (using the proactive waiver function in the bidding

software) during a bidding period in which no bids are submitted, the

auction will remain open and the bidder's eligibility will be

preserved. An automatic waiver invoked in a round in which there are no

new valid bids will not keep the auction open.

21. The Commission proposes that each bidder in the VHF public

coast station auction will be provided five activity rule waivers that

may be used in any round during the course of the auction as set forth

above. The Commission seeks comment on this proposal.

F. Information Regarding Bid Withdrawal and Bid Removal

22. For the VHF public coast station auction, the Commission

proposes the following bid removal and bid withdrawal procedures.

Before the close of a bidding period, a bidder has the option of

removing any bids placed in that round. By using the remove bid

function in the software, a bidder may effectively ``unsubmit'' any bid

placed within that round. A bidder removing a bid placed in the same

round is not subject to withdrawal payments.

23. Once a round closes, a bidder may no longer remove a bid.

However, in the next round, a bidder may withdraw standing high bids

from previous rounds using the withdraw bid function. A high bidder

that withdraws its standing high bid from a previous round is subject

to the bid withdrawal payment provisions. The Commission seeks comment

on these bid removal and bid withdrawal procedures.

24. In the Part 1 Third Report and Order, 63 FR 2315 (January 15,

1998), the Commission recently explained that allowing bid withdrawals

facilitates efficient aggregation of licenses and the pursuit of

efficient backup strategies as information becomes available during the

course of an auction. The Commission noted, however, that in some

instances bidders may seek to withdraw bids for improper reasons,

including to delay the close of the auction for strategic purposes. The

Bureau, therefore, has discretion, in managing the auction, to limit

the number of withdrawals to prevent strategic delay of the close of

the auction or other abuses. The Commission stated that the Bureau

should assertively exercise its discretion, consider limiting the

number of rounds in which bidders may withdraw bids, and prevent

bidders from bidding on a particular market if the Bureau finds that a

bidder is abusing the Commission's bid withdrawal procedures.

25. Applying this reasoning, the Commission proposes to limit each

bidder in the VHF public coast station auction to withdrawals in no

more than two rounds during the course of the auction. To permit a

bidder to withdraw bids in more than two rounds would likely encourage

insincere bidding or the use of withdrawals for anti-competitive

strategic purposes. The two rounds in which withdrawals are utilized

will be at the bidder's discretion; withdrawals otherwise must be in

accordance with the Commission's rules. There is no limit on the number

of standing high bids that may be withdrawn in either of the rounds in

which withdrawals are utilized. Withdrawals will remain subject to the

bid withdrawal payment provisions specified in the Commission's rules.

[[Page 40909]]

The Commission seeks comment on this proposal.

G. Stopping Rule

26. For the VHF public coast station auction, the Bureau proposes

to employ a simultaneous stopping approach. The Bureau has discretion

``to establish stopping rules before or during multiple round auctions

in order to terminate the auction within a reasonable time.'' The

Commission therefore has the discretion to adopt an alternative

stopping rule to the simultaneous stopping rule if we deem appropriate.

Thus, unless circumstances dictate otherwise, bidding would remain open

on all licenses until bidding stops on every license. The auction would

close for all licenses when one round passes during which no bidder

submits a new acceptable bid on any license, applies a proactive

waiver, or withdraws a previous high bid.

27. The Commission proposes that the Bureau retain the discretion

to keep an auction open even if no new acceptable bids or proactive

waivers are submitted and no previous high bids are withdrawn. In this

event, the effect will be the same as if a bidder had submitted a

proactive waiver. The activity rule, therefore, will apply as usual and

a bidder with insufficient activity will either lose bidding

eligibility or use a remaining activity rule waiver.

28. Finally, the Commission proposes that the Bureau, reserve the

right to declare that the auction will end after a specified number of

additional rounds (``special stopping rule''). If the Bureau invokes

this special stopping rule, it will accept bids in the final round(s)

only for licenses on which the high bid increased in at least one of

the preceding specified number of rounds. The Bureau proposes to

exercise this option only in circumstances such as where the auction is

proceeding very slowly, where there is minimal overall bidding

activity, or where it appears likely that the auction will not close

within a reasonable period of time. Before exercising this option, the

Bureau is likely to attempt to increase the pace of the auction by, for

example, moving the auction into the next stage (where bidders would be

required to maintain a higher level of bidding activity), increasing

the number of bidding rounds per day, and/or increasing the amount of

the minimum bid increments for the limited number of licenses where

there is still a high level of bidding activity. The Commission seeks

comment on these proposals.

H. Information Relating to Auction Delay, Suspension or Cancellation

29. For the VHF public coast station auction, the Commission

proposes that, by public notice or by announcement during the auction,

the Bureau may delay, suspend or cancel the auction in the event of

natural disaster, technical obstacle, evidence of an auction security

breach, unlawful bidding activity, administrative or weather necessity,

or for any other reason that affects the fair and competitive conduct

of competitive bidding. In such cases, the Bureau, in its sole

discretion, may elect to: resume the auction starting from the

beginning of the current round; resume the auction starting from some

previous round; or cancel the auction in its entirety. Network

interruption may cause the Bureau to delay or suspend the auction. The

Commission emphasizes that exercise of this authority is solely within

the discretion of the Bureau, and its use is not intended to be a

substitute for situations in which bidders may wish to apply their

activity rule waivers. The Commission seeks comment on this proposal.

Amy Zoslov,

Chief, Auctions and Industry Analysis Division, Wireless

Telecommunications Bureau.

[FR Doc. 98-20524 Filed 7-30-98; 8:45 am]

BILLING CODE 6712-01-P