The House Energy and Commerce Committee is holding a hearing on Friday on spectrum and public safety communications issues. In advance of the event, key Republican lawmakers have circulated a discussion draft of new spectrum auction and public safety band rules. It's an interesting read for anyone interested in wireless unlicensed broadband.

Among the proposals, the law sets up an auction system for the allocation of spectrum for unlicensed use—think "white space" devices and WiFi. The Federal Communications Commission would be required to conduct auctions in which bidders could declare their intention to buy spectrum for licensed or unlicensed deployment.

But (our italics): "The Commission may only exercise its authority under this Act to allocate a portion of the spectrum for unlicensed use if—the bids for unlicensed use, in the aggregate, exceed the highest bid for such license."

If an unlicensed spectrum sale went through under this condition, the FCC would be forbidden to impose any rules on the sale winner that "limits the ability of a licensee to manage the use of its network, including management of the use of applications, services, or devices on its network, or to prioritize the traffic on its network as it chooses."

Plus the bill bars the FCC from imposing any wholesale reselling requirement on the license buyer, or "limit participation in such system on the basis of the total amount of spectrum licenses held by a person seeking such participation" (memo to AT&T and Verizon: come on in and buy it all!).

Most intriguingly, instead of taking a percentage of FCC auction revenue, a television broadcast license holder who posted some of her licenses up for auction sale could ask for a waiver or change in "any provision of law administered by the Commission, or any regulation of the Commission promulgated under any such provision." The FCC could "grant as it considers appropriate, a waiver or modification of the application to such licensee."

In other words, the bill proposes allowing broadcasters to purchase the right to apply for waivers or changes in the Communications Act.

No more "free riders"

The short title of the draft law is the "Spectrum Innovation Act of 2011," and it addresses some of the FCC's biggest policy goals. These include the agency's bid to grapple with the "looming spectrum shortage."

Wireless companies and the Commission insist that the ISPs will, relatively soon, run out of a sufficient amount of spectrum licenses to meet the enormous demand for smartphones. So the agency wants to encourage TV broadcasters to sell some of their spectrum to wireless companies via "incentive auctions," in which the license owners would receive a share of the auction proceeds.

The process has been going rather slowly thus far, with broadcasters showing little public enthusiasm for the idea. But the draft bill also weighs in on how spectrum for unlicensed use could be allocated. From whence come its new creative proposals? The FCC, it seems.

According to the majority committee memorandum on the draft, the language takes inspiration for its proposals from a 2008 FCC Working Paper titled "A Market-Based Approach to Establishing Licensing Rules: Licensed Versus Unlicensed Use of Spectrum."

The three authors of the paper posit the existence of two types of firms when it comes to wireless auctions. There are "L-type" companies like AT&T and Verizon that prefer to bid on licensed spectrum accompanied by licensing rules "that enable them to exclude non-payers and to receive protection from harmful interference from other service providers."

Then there are "U-type" firms that would prefer to see the spectrum go to unlicensed use. These would include Google, Yahoo, and Microsoft, and device makers like Motorola and Cisco. The former favor white space and WiFi systems because they provide inexpensive access to their sites. The latter build and market devices facilitating that inexpensive access.

"Unlicensed use makes it possible for Internet users and entities (e.g., Google, Microsoft, Yahoo) that wish to sell access to such users to advertisers to do so without the possibility of paying a fee to an intermediary (e.g., Verizon, Comcast)," the authors write.

Because of the common pool resource nature of spectrum designated to unlicensed use, the benefit that a given firm receives from expending the effort to avoid such a fee extends to every U-Type firm. The ability of a given firm to benefit from the actions of another firm introduces a public good aspect to the economic problem. In the current context, although it is in every U-Type firm's interest to have spectrum designated to unlicensed use, any individual U-Type firm has an incentive to "free ride" off the bids of others bidders in an attempt to maximize its own profits. If a significant number of U-Type firms elect to free ride, then the efficient designation of spectrum to licensed and unlicensed operations may not occur.

So to deal with this aforementioned "free-riding," the writers experimented with auctions equipped with "a simple set of rules [that] enables the auctioneer to assess the value bidders place on having one or more blocks of spectrum designated to licensed versus unlicensed operations."

Interestingly, their experiments found a lack of balance between licensed and unlicensed spectrum—the results leaning heavily on the licensed side. But the draft legislation being considered is presumably responsive to the "free rider" logic with the new bidding threshold for unlicensed use.

White spaces stood on their head?

The bill also addresses that endless conundrum—the allocation of public safety spectrum. As watchers of the 2008 700MHz auction recall, the FCC failed to auction off portions of the public-safety allocated 700MHz D Block to a commercial bidder who would share it with first responders. Finding a new solution for distributing the spectrum has been slow going ever since.

The draft unties this Gordian knot by requiring the Commission to assign to each state an exclusive use license of spectrum in the 763 to 768MHz and 793 to 798MHz zones.

Ars readers will not be surprised to learn that Verizon is a great fan of this draft document. House Democrats like Anna Eshoo (D-CA) and Henry Waxman (D-CA) are less enthused. "There are important differences between our approach and the Republicans', but I hope that we will be able to work together to develop a bipartisan consensus," their press statement explains.

Waxman and Eshoo have released a counter draft which does not include the licensed-versus-unlicensed provisions. Instead: "the Commission may, if consistent with the public interest, disburse a portion of the proceeds of [auction] bidding to other licensees for the purpose of ensuring that portions of the television broadcast spectrum remain available for unlicensed use on a nationwide basis and in each local market," their draft explains.

Least enthusiastic about the majority party draft is Harold Feld of Public Knowledge. "Unlicensed spectrum is, economically, a very different type of good from the kind of good from licensed spectrum," his post against the proposal concludes:

Licensed spectrum provides the opportunity to use spectrum at higher power with interference protection. Unlicensed spectrum provides much broader, lower cost access in exchange for lower power and no interference protection. Both types of spectrum are needed to maintain a robust spectrum environment that promotes job creation, innovation and competition among providers of all wireless services. The only justification for the proposal is that mistaken idea that a large company such as Google or Microsoft has a duty to pay for spectrum that will equally benefit Verizon, AT&T, or any other company or user that accesses the spectrum. But this assumption stands the true value of the TV white spaces on its head. By making the resource available to everyone, the FCC creates new value enjoyed by every company, innovator, retailer and user.

There are obviously going to be a lot of questions about these ideas. Still, one wonders how many TV broadcasters would apply for a waiver on the FCC's indecency rules in exchange for selling some of their spectrum.

Friday's subcommittee discussion about the draft will include representatives from CTIA - The Wireless Association, The National Association of Broadcasters, the police department of San Jose, California, and the New America Foundation.

Listing image by Photograph by Martin Abegglen