Telus report levels harsh criticism at Industry Canada for AWS auction design

Flaws in Industry Canada’s Advanced Wireless Services (AWS) spectrum auction design resulted in bidders, largely the incumbent providers, paying $2.4 billion more than they should have, according to a report conducted for Telus Corp. But the department says the auction did exactly what it was designed to do which was to maximize the economic and social benefits to Canadians. Neither the minister, nor department officials were available for an interview on the report. But in a now-standard email response to questions, Industry Canada wrote: “In the AWS auction, we set out to create a more competitive market with more choice for consumers and businesses, something we believe will ultimately lead to lower prices. To accomplish this, 40 out of 105 megahertz was set aside exclusively for new entrants to bid on.” The July 14 study, Regulatory Policy Goals and Spectrum Auction Design: Lessons from the Canadian AWS Auction done by New York City-based NERA Economic Consulting, says the spectrum set aside and the definition of a new entrant contributed “partially, if not fully” to the $2.4-billion overpayment. NERA contends that the set aside provision artificially raised demand, and subsequently prices, for the non-reserved spectrum by allowing new entrants to bid on both reserved and non-reserved bandwidth. New entrants raised the price of non-reserved spectrum by bidding on it despite not wanting to acquire those licences. This is a practice known as fake bidding, where a bidder with no intention of buying a particular licence continues to drive up the price of that licence. While NERA acknowledges that there could be cases where the bidder was truly interested in the licence or was simply “parking points” to maintain its eligibility, it doesn’t explain the vast number of examples it found during the auction. “What is clear, however, is that the specific auction design used by Industry Canada provided an opportunity for entrants to increase the prices of unrestricted licenses, while providing incumbents no opportunity to retaliate. Hence, one logical (and likely correct) answer to the auction behavior described above is that entrants took advantage of this opportunity,” reads the report. NERA also argues that the auction’s definition of new entrant played a large role in the overpayment. It says regional incumbents such as SaskTel and MTS Allstream, and firmly established and converged players such as Shaw Communications and Vidéotron ltée, didn’t need any help from the government. As well, the report states that the definition of a new entrant based on share of the national wireless market is inconsistent with the Competition Bureau of Canada’s use of provincial market share data. According to the report, the combination of the spectrum set aside rule and the definition of a new entrant led to a spectrum auction haul that was between 105% and 173% higher than the AWS auction in the US depending on the economic model used. NERA notes that the average price per MHz-Pop in the US AWS auction was $0.57, while the Canadian mean prices per MHz-Pop were $1.26 for set aside bandwidth and $1.78 for unrestricted spectrum. While the department chose not to respond to many of Report on Wireless’ specific questions, it did take a swipe at the report for its price per MHz per Pop comparison of the US and Canadian AWS auctions. “Comparisons of auction prices paid for similar spectrum between one country and another is a challenge and should take into consideration a range of variables including the differences in the respective jurisdictions' industry dynamics, client base, market conditions and regulatory practices and differences in the characteristics of the spectrum being auctioned,” Industry Canada wrote. “The success of an auction should ultimately be judged by the benefits Canadians derive from a more competitive market in the provision of wireless services, namely more services at lower prices,” concluded the department, adding, “Bidders base their bids on their business plan expectations of the post-auction competitive environment.” The report suggests that Industry Canada’s goals could be compromised if it opts to conduct future auctions as it did the AWS bandwidth sale. “If the Canadian AWS auction design was responsible for the extremely high prices of the spectrum licenses, it could harm the very policy objectives that Industry Canada strives to achieve if the same auction design were to be used for future Canadian spectrum auctions,” states the report.

Telus report levels harsh criticism at Industry Canada for AWS auction design

News | July 22, 2009

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