Location and Monitoring Service Spectrum Auction Scheduled For December 15, 1998; Comment Sought on Reserve Prices or Minimum Opening Bids and Other Auction Procedural Issues

FEDERAL COMMUNICATIONS COMMISSION

[Report No. AUC-98-21-A (Auction No. 21); DA 98-1616]

Location and Monitoring Service Spectrum Auction Scheduled For

December 15, 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 528 multilateration

Location and Monitoring Service licenses scheduled for December 15,

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 September 2, 1998. Reply comments

are due on or before September 9, 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: Kathy Garland, Bob Reagle or Kenneth

Burnley, Auctions and Industry Analysis Division, Wireless

Telecommunications Bureau, at (202) 418-0660.

SUPPLEMENTARY INFORMATION: This public notice was released on August

13, 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

(``Bureau'') announces the auction of 528

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multilateration Location and Monitoring Service (``LMS'') licenses set

to begin on December 15, 1998. Three blocks of spectrum are allocated

for multilateration LMS systems:

(1) Block A 904.000-909.750 MHz and 927.750-928.000 MHz

(2) Block B 919.750-921.750 MHz and 927.500-927.750 MHz

(3) Block C 921.750-927.250 MHz and 927.250-927.500 MHz

2. One license will be awarded for each of these spectrum blocks in

each of 176 Economic Areas (EAs) designated for LMS. The 176 EAs

designated for the LMS auction comprise the following areas: (1) the

continental United States, Hawaii and Alaska (Alaska to be licensed in

a single area); (2) Guam and the Northern Mariana Islands (to be

licensed in a single area); (3) Puerto Rico and the U.S. Virgin Islands

(to be licensed in a single area); (4) America Samoa; and (5) the Gulf

of Mexico. Thus, there are a total of 528 multilateration LMS licenses

to be auctioned.

3. Future public notices will include further details regarding

application filing and payment deadlines, a seminar, and other

pertinent information. In this Public Notice, the Commission seeks

comment on procedural issues relating to the LMS auction.

I. Reserve Price or Minimum Opening Bid

4. 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.

5. 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.

6. In anticipation of this auction and in light of the Balanced

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

the LMS 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.

7. Specifically, the Commission proposes the following formulas for

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

Auction No. 21:

(1) Block A $0.004*MHz*Pops (rounded up to the next dollar and no less

than $2,850 per license)

(2) Block B $0.004*MHz*Pops (rounded up to the next dollar and no less

than $2,500 per license)

(3) Block C $0.004*MHz*Pops (rounded up to the next dollar and no less

than $2,800 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 LMS 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

8. 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 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

9. Because it is most administratively appropriate, and allows

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

the Commission proposes to award the 528 multilateration LMS 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

10. 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.

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

period of

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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.

12. For the LMS 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

13. 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 LMS 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

14. 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.

15. 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)

1. 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)

2. Minimum bid increment using the percentage increment (I1

from above)0.2 * $1,000,000=$200,000]

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

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

1. 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)

2. Minimum bid increment using the percentage increment is

(I2 from above)0.2 * $2,000,000=$400,000

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

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

1. 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)

2. Minimum bid increment using the percentage increment (I3

from above)0.175 * $2,400,000=$420,000

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

d. Initial Maximum Eligibility for Each Bidder

16. 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 for the LMS auction the following upfront

payments:

(1) Block A $0.002*MHz*Pops (rounded up to the next dollar and no less

than $2,850 per license)

(2) Block B $0.002*MHz*Pops (rounded up to the next dollar and no less

than $2,500 per license)

(3) Block C $0.002*MHz*Pops (rounded up to the next dollar and no less

than $2,800 per license)

The Commission seeks comment on this proposal. For the LMS auction,

the Commission further proposes that the amount of the upfront payment

submitted by a bidder will determine

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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 LMS auction be

provided with 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 LMS 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, 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 LMS 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. The Commission

seeks comment on this proposal.

g. Stopping Rule

26. For the LMS 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 for the LMS auction an

alternative stopping rule to the simultaneous stopping rule if the

Commission deems it 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

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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 LMS 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.

Mark Bollinger,

Deputy Division Chief, Auctions and Industry Analysis Division,

Wireless Telecommunications Bureau.

[FR Doc. 98-22293 Filed 8-18-98; 8:45 am]

BILLING CODE 6712-01-P