A Private Windfall For Public Property

[Dave Farber <dave () farber net>]

This is an interesting article. It is followed by a commentary Gerry 
Faulhaber . Try to read both.

Dave



washingtonpost.com

A Private Windfall For Public Property

By Norman Ornstein and Michael Calabrese

Tuesday, August 12, 2003; Page A13

We're no fans of the attempt by the Federal Communications Commission to 
relax ownership requirements for TV stations and newspapers, but it would 
be a shame if the battle between FCC Chairman Michael Powell and Congress 
on this issue distracted attention from another harmful move being 
contemplated by the commission.

We're talking about the privatization of the airwaves, a public resource 
worth hundreds of billions of dollars in both market value and future 
federal revenue. The contemplated FCC action could result in the biggest 
special interest windfall at the expense of American taxpayers in history.

The rapid trend toward wireless communication has made access to the prime 
frequencies that pass easily through walls, trees and weather an 
increasingly valuable right. A recent study estimated the market value of 
this spectrum at $770 billion. These airwaves are owned by the public. For 
more than 75 years broadcasters, cellular phone companies and other 
commercial service providers have acquired exclusive access to scarce 
spectrum space only under temporary, renewable licenses; in return, they 
serve the public interest.

But if the FCC has its way, that social contract will be voided. In recent 
months, through a series of rule changes, the FCC has begun to implement a 
radical shift in the nation's spectrum allocation policy. Recently it 
adopted rules allowing licensees -- whether or not they paid the public for 
their license -- to sell or rent unused capacity to other firms. It also 
proposed to let universities and other holders of free licenses sell their 
spectrum to private firms, thus encouraging these hard-pressed nonprofit 
institutions to abandon their educational use of the airwaves in return for 
a quick buck on the new private spectrum markets.

The blueprint for this privatization of the public airwaves is a pair of 
FCC staff reports released last November. In essence, the FCC's Spectrum 
Policy Task Force proposes that incumbent licensees be granted permanent, 
private-property-like rights in the frequencies they currently borrow. The 
task force proposes that future licenses grant firms "maximum possible 
autonomy" to decide what services to offer, what technical standards to 
adopt or whether instead to sell or sublease their frequency assignments to 
other firms. In the future, access to the airwaves would be a commodity 
traded on secondary markets and free of virtually all public interest 
obligations.

This is not all bad. The FCC's outdated command-and-control approach -- 
based on rigidly zoning the airwaves by service and assigning exclusive 
licenses at zero cost -- has exacerbated the scarcity of wireless 
bandwidth, stifling competition, slowing innovation and restricting citizen 
access to the airwaves. The problem is not the stated goals of the task 
force but the means of achieving them.

The commission's senior economists have added a proposal that these new and 
valuable rights to sell and sublease frequencies be given away to incumbent 
licensees at no charge. The proposal is dressed up as an "auction," but it 
is one in which any incumbent opting to sell its license would be entitled 
to keep 100 percent of the revenue -- money that under current law would 
flow into the public treasury. The logic of the proposal is that 
broadcasters and other spectrum incumbents have so much political clout 
that the only practical way to reduce scarcity is to bribe them to bring 
their spectrum to market.

But this approach confers a massive and undeserved financial windfall -- up 
to $500 billion -- on a few lucky industries. And freezing the old zoning 
system into permanent private property rights would forestall emerging 
"smart" radio technologies that can dynamically share today's underutilized 
spectrum space. Today the fastest-growing demand for telecommunications 
involves inexpensive WiFi -- short for "wireless fidelity." College 
campuses and "hot spots" in airports and Starbucks offer this cheap and 
mobile Internet access by creating a wireless local area network on a small 
band of "unlicensed" frequencies shared with cordless phones, microwave 
ovens and baby monitors. Unfortunately, privatizing frequencies would turn 
this sharing into "trespassing," allowing licensees to demand payment for 
access to their airwaves.

Market-based spectrum reform can be achieved without a massive giveaway. 
The flexible new licenses proposed by the FCC task force could be rented 
for fixed terms. This would put all companies on a level playing field, 
permit property-like rights for limited periods, protect capital investment 
by incumbents and internalize incentives to use spectrum efficiently.

The good news is that the FCC cannot transfer a wireless windfall to 
special interests without additional authorization from Congress. Both the 
administration and some influential members of Congress have expressed 
support for spectrum user fees. The bad news is that Congress is not 
exactly trustworthy when it comes to protecting the public interest from 
broadcasters and other powerful license holders. The champions of the 
public, led by Sen. John McCain, have their work cut out for them.

Norman Ornstein is a resident scholar at the American Enterprise Institute. 
Michael Calabrese directs the Spectrum Policy Program at the New America 
Foundation.

© 2003 The Washington Post Company

> Date: Sat, 16 Aug 2003 17:51:26 -0400
> From: "Faulhaber, Gerald" <faulhabe () wharton upenn edu>
>
>
> Some Comments re: Private Windfall article in WashPost
>
> An interesting but somewhat confused discussion of the FCC's recent and
> very tentative moves toward introducing markets into spectrum
> allocation.  Let's take take the points one at a time.
>
> 1- spectrum is a public resource worth hundreds of billions of dollars
> in market value and future government revenues...  Spectrum is not
> actually owned by anyone (as the government has made clear), but the
> government (FCC and NTIA) are the gatekeepers, allocating various bands
> to private and public users via bureaucratic and political processes
> (the author is quite right that the current system is insane; it has led
> to huge inefficiencies in spectrum use).  But the question is: what's
> the best way to allocate this important resource?  We know that the
> current method is a mess and nobody wants that.  How do we usually
> allocate resources?  By the market, of course, and that is what the FCC
> is slowly moving toward.  What could be more important resources than
> food and land (to name but two), both of which are allocated via the
> market without people claiming a "public resource" is being given away.
>
> 2- the guys that now control the spectrum shouldn't get it  because that
> would be a big giveaway.  I agree.  In the best of all possible worlds,
> the government should take back all the spectrum at the end of the
> license period and then sell or lease it all out, with the money going
> to the government.  This event will occur right after the Tooth Fairy
> gives us all winning lottery tickets!  Yes, the plans afoot would de
> jure grant current license holders what they de facto now have: a
> reasonably permanent license to use the spectrum.  Is this this a
> private windfall?  No, we've already given it away; the private windfall
> has already occurred when the FCC passed out these licenses.  All this
> does is permit the spectrum to move to holders that could put it to
> better use.  Friends, the windfall has already happened decades ago:
> they have the spectrum and they are not giving it back.  To get the
> spectrum "into play" (i.e., to its highest valued use), we have to live
> with our past mistakes.  Fairness?  Of course not.  But grow up; the
> teacher isn't going to intervene to fix this schoolyard tiff.  We have
> to be realists here.
>
> 3- Social contract?  Serve the public interest?  Puh-lease!  This is a
> bit of public policy fluff the FCC put out in the 1950s and has stayed
> with us.  Please tell me *any* public
> Interest being served by private spectrum holders that is other than
> pure profit maximization.  This has never happened and never will.  More
> Tooth Fairy stuff.
>
> 4- Privatization does away with WiFi?  Not a chance.  What we now call
> "Part 15" spectrum (FCC-speak for spectrum open for use by anyone that
> follows the rules and uses the right equipment) would continue to be
> available; it would be "owned" by the government who would set the
> rules.  Using the land analogy, lots of land is owned by the government
> which operates it as a regulated commons, such as national parks, state
> forests, etc.  Existing Part 15 spectrum (or even new spectrum that the
> government designates) could continue to be a regulated commons,
> provided that was the best use of it.
>
> 5- "freezing old zoning system ... would forestall emerging "smart"
> radio technologies that can dynamically share today's underutilized
> spectrum space."   Well, no.  Dave Farber and I have made a proposal for
> spectrum management that marries property rights with a "noninterference
> easement" that explicitly permits "smart" radio technologies.
>
> Interesting article; but the AEI is known for getting its facts right,
> and this time the author was rather off-target.
>
> Professor Gerald R. Faulhaber
> Business and Public Policy Dept.
> Wharton School, University of Pennsylvania
> Philadelphia, PA 19104
>
> -----Original Message-----
> From: Dave Farber [mailto:dave () farber net]
> Sent: Wednesday, August 13, 2003 4:43 PM
> To: Faulhaber, Gerald
> Cc: farber () cis upenn edu
> Subject: comments for ip?

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