EVENTS

Date:	Tuesday, April 19, 2005
Time:	11:15 AM -- 1:00 PM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

April 2005

Managing Spectrum: Why Economics Matters

On April 19, the AEI-Brookings Joint Center hosted a conference on spectrum allocation and management. Current spectrum regulations are widely viewed as inefficient and costly, but there is no consensus regarding the best way to manage spectrum. Some believe that market mechanisms--usually in the form of auctions--are the best way to maximize spectrum’s value. Others argue that spectrum is a public good, and that at least some of it should be treated as a common resource open to any potential entrant. Proponents of this commons approach maintain that new interference-avoiding technology makes licensing unnecessary and impractical. Experts discussed the pros and cons of different forms of spectrum governance at the conference.

Professor William Baumol presented his new paper, entitled “Toward An Evolutionary Regime for Spectrum Governance: Licensing or Unrestricted Entry?” which evaluates different proposals for a new spectrum management regime, in particular the contrast between private licensing and a public or commons approach.

William Baumol
New York University and Princeton University

Mr. Baumol discussed his paper, which advocates a “quasi-market” regime for allocating spectrum, after considering the pros and cons of various licensing and commons approaches. He emphasized that his support for a market-based mechanism was not automatic or ideologically driven, but rather that he specifically believed it to be the best way to promote efficient, innovative use of spectrum after considering all options. He endorsed the auctioning of private spectrum licenses, allowing for resale and renting in order to avoid artificial scarcity through hording. He rejected the commons approach, warning of the serious externalities that could arise from interference in a crowded, unorganized user pool. While appreciating that some technological advances were helping to reduce interference problems, he noted that this trend was not guaranteed to continue and that innovation could also create new, unforeseeable crowding problems. Mr. Baumol closed by calling for periodic reassessments of the license supply in order to allow flexibility in light of the unpredictability of the interference situation. He suggested re-auctioning the licenses every fifteen years so that they could be revalued if need be, and that this interval be widely known and consistent in order to minimize investment uncertainty for licensees.

Gerald Faulhaber
Wharton School of the University of Pennsylvania

Mr. Faulhaber generally agreed with Mr. Baumol’s spectrum licensing approach, focusing his commentary on spectrum use by non-interfering agents once licenses were distributed. Here he disagreed with Mr. Baumol’s contention that a “private commons,” or market-based allocation of secondary, or non-interfering, spectrum space was a better system than government-allocated “easements.” He noted that transaction costs, including bargaining for and enforcing agreements, as well as detecting and identifying interference, could be substantial. Thus licensees may be tentative about lending out their unused space and instead let it go to waste. Government easements, on the other hand, could be granted readily and cheaply to those with non-interfering capabilities, and should satisfy, at least in part, commons supporters’ calls for broader public access. Mr. Faulhaber agreed with Mr. Baumol’s argument for limited-term licensing, though he noted that it would be difficult for regulators to make credible commitments regarding specific actions to be taken fifteen years in the future given pressures from various interest groups.

Ellen Goodman
Rutgers University Law School-Camden

Ms. Goodman claimed that a property rights framework was now widely accepted as superior to a commons framework, suggesting that much of the current debate centered on how best to implement and operate licensing. She offered some legal perspective on licensee rights, in particular with regard to the issue of non-interfering entities. She argued that licenses should not be seen as granting physical possession of a given frequency, but rather as allowing transmittance along that frequency, free from harmful outside interference. She argued that licensees should not have the power to exclude or negotiate the terms of non-interfering use of their frequencies, as this would amount to an extra right to which they were not entitled. Thus, viewing the unused space as not belonging to anyone, she rejected the notion of a secondary market and favored government easements. She recognized that some interference would be inevitable and recommended implementing procedures for identifying violators and resolving conflicts.

Thomas Hazlett
Manhattan Institute for Policy Research

Mr. Hazlett generally regarded Mr. Baumol’s paper as a valuable demonstration of how the market can be used effectively to allocate an intangible good like spectrum use. His most significant point of disagreement was over the periodic redistribution of licenses. He felt that Mr. Baumol was contradicting the central revelation of his own paper, that the market does a better job than central planners at allocating resources. He suggested that giving regulators control over the license supply would introduce inefficient rent-seeking influence and would also create uncertainty that would significantly discourage innovation and long-term investment. He viewed potential interference as a welcome sign of more saturated spectrum usage, in contrast to the vast underutilization today, and expressed confidence that market-based negotiations would sufficiently resolve any future conflicts among licensed users. He similarly rejected proposals for government regulators to grant non-interfering easements, entrusting that licensees would rent out space they did not need via the market.

Question and Answer

The panel admitted the political difficulty of taking back control of the spectrum from the broadcasters that currently utilize it and acknowledged that some compensation would likely be necessary to recoup the existing licenses, even though they have thus far been used free of charge.

Mr. Hazlett reiterated his opposition to re-auctioning spectrum licenses periodically, not wanting to cede any control of the process to regulators, who inevitably distort the market. He emphasized the capital-intense nature of the communications industry, noting that any disruptions or uncertainty in the market could significantly hurt investment. Mr. Baumol defended the reallocation component of his proposal, claiming that regulators would only be able to change the number of permits and would not be able to control who gets them or to alter the process in any other way. He considered this limited amount of flexibility in the system to be worthwhile and pointed to other regimes such as pollution permits where similar supply control is practiced.

This summary was prepared by AEI-Brookings Joint Center for Regulatory Studies research assistant Jesse Gurman.