Appendix C to the Notice of Proposed Rulemaking
Supplement to Appendix C: Auctionomics/Power Auctions Option for Forward Auction (February 1, 2013)

Clearing Rule

The Clearing Rule specifies how the FCC will match demand and supply to determine the number of channels converted from broadcast to flexible use. Here we describe a general approach to the Clearing Rule. It is meant to be adaptable to a range of possible FCC decisions, including whether to conduct the Reverse Auction first, followed by the Forward Auction, or whether to interleave the two. The Clearing Rule incorporates a Net Revenue target that is some minimum amount because Section 6403(c)(2) of the Spectrum Act creates a minimum proceeds requirement for closure of the forward auction.

We first describe the Clearing Rule for a case in which the Reverse Auction is run first, followed by the Forward Auction, and in which the target number of channels to be cleared can only decrease during the Forward Auction. We then describe how to modify the rule so that the target number of channels cleared also can increase, and how to apply the Clearing Rule if the Reverse Auction and Forward Auction are run together in “interleaved” fashion.

Reverse Auction and Clearing Cost

The Reverse Auction determines the total amount that must be paid to broadcasters to achieve each Clearing Target of n channels (up to the maximum N). This is the Clearing Cost for n channels. As described above, the Reverse Auction may allow for variations in the numbers of licenses cleared in various EAs, so that when n channels are targeted for clearing, a smaller number of channels may be cleared in certain Impaired EAs.

Forward Auction Supply

The Forward Auction begins by setting Supply based on the Band Plan conversion of N channels (the maximum from the Reverse Auction) into wireless licenses. As the Forward Auction proceeds, the Supply may be adjusted to reflect the Band Plan conversion of a smaller number of channels, n<N.

Provisional Forward Auction Proceeds

At any point in the Forward Auction, the Provisional Proceeds associated with selling the current Supply may be computed as follows: for each license type, multiply the current price times the total number of that license type that would be sold (the minimum of the Supply and the Aggregate Demand) and sum across license types. We might also want to account for potential revenue from licenses that would be unsold, but that may be sold at a later date. To do so we could value each unsold license at some fraction of the current price of the same type of license.

Closing Conditions

The design will incorporate conditions that must be met for the auction to close. These conditions could require a minimum Net Revenue Target (Net Revenue is defined to be the difference between the Provisional Revenue from the Forward Auction and the corresponding procurement cost in the Reverse Auction), which would be at least sufficient to meet the statutory minimum proceeds requirement. A Closing Condition would be satisfied when the Net Revenue Target is reached or exceeded and there is no excess demand for any products. If the Net Revenue Target cannot be reached using the current provisional Clearing Target, then the provisional Clearing Target would be reduced by one channel and the Forward and Reverse auctions would continue. Additionally, the Closing Conditions could incorporate a trade-off between the amount of spectrum cleared and Net Revenue to ensure that the Commission does not give up too much spectrum clearing to attain slightly higher Net Revenue. If the increase in Net Revenue relative to the reduction in spectrum is too low, the auction would end at the previous (greater) Clearing Target. If the increase in Net Revenue relative to the reduction in spectrum is sufficiently large, the auction would continue with new, reduced Clearing Targets, until the clearing conditions are met.

Timing

The Clearing Rule we have described is consistent with two general approaches to auction timing. In one (the “Reverse Auction first” approach), the Reverse Auction is conducted for a series of provisional Clearing Targets before the Forward Auction begins. The second is a “staged” approach, in which the Forward and Reverse Auctions for n cleared channels could be conducted in parallel. If the Closing Conditions for n channels are not satisfied before the Forward Auction demand falls below the provisional Clearing Target, then the provisional Clearing Target is reduced and both auctions continue. This second approach requires close coordination between the two auctions, so that both can be run in the same time frame, but has the advantage that it requires bids only for the Clearing Targets that might actually be implemented. This staged approach preserves more privacy for bidders in both the Forward and Reverse Auctions than the Reverse Auction first approach.