Whatever happened to the FCC’s big spectrum auction?

Michael Giberson

If you, like me, were looking forward to the FCC’s auction of prime 700 MHz wireless spectrum — and frankly who wouldn’t be interested in seeing how the FCC’s new hierarchical package bidding rules worked out in the C-block auction — you may have noticed the distinct lack of news on the topic in the major press.

Jump to the FCC’s auction website, however, and you’ll see the auction action continues. Auction round 175 will start in about 30 minutes.

Only 13 new bids were received in round 174, with licenses still contested for places like Minot, ND and Salisbury, MD. Just about all of the major results are already resolved, except that technically all auctions remain open until they all are ready to close. But C-block hasn’t seen a new bid since round 90. D-block, the spectrum loaded with public service obligations, received a single bid back in round 1.

There is light at the end of the tunnel. The FCC has ramped up the pace to 10 rounds per day, and an industry analyst was quoted by Reuters as saying the auction should be wrapped up within a week.

What institutional framework for electric power transmission?

Michael Giberson

From the EU Energy Policy Blog, Thomas-Olivier Léautier contemplates the factors that contribute to efficient investment and management of transmission systems:

As power engineers and economists have known for a long-time, the transmission grid is essential to the operation of well-functioning electric power markets. Yet, grid expansion in several regions has been nil or slow. By reviewing the main prescriptions from academic literature and comparing them with case studies from over 16 jurisdictions we find that unless the governance structure is appropriate and specific incentives are provided, grid expansion proves elusive.

After a brief examination of how physical limits and operational practices jointly contribute to transmission capacity, Léautier summarizes the results of theoretical and empirical work he did with Véronique Thelen:

The empirical evidence collected in this study appears consistent with theoretical prescriptions: creation of an independent transmission company subject to strong grid expansion incentives lead to congestion alleviation (e.g., England and Wales).

On the other hand, the Independent System Operator (ISO) model pursued in the United States, where operation but not ownership of the grid is vertically unbundled, does not appear to have performed well. This is consistent with “theoretical” predictions: transmission asset owners in the ISO model face mixed incentives for expansion resulting from limited vertical unbundling of the assets.

Pre-auction jitters at the FCC

Michael Giberson

Over 200 companies have qualified to participate in the upcoming FCC spectrum auction. While that sounds like enough to create a lot of competition, as the auction approaches FCC chairman Kevin Martin is beginning to sound a little nervous. Yesterday he expressed concern that problems in the credit markets and general economic conditions may discourage some bidders or limit their ability to participate, Reuters reported. However, “Martin said the auction must go forward since Congress has ordered the FCC to begin the auction by January 28.”

Contributing to pre-auction jitters at the FCC may be the recent demise of Frontline LLC. Frontline had been expected to be one of the primary bidders for the “D Block” spectrum, the band of airwaves that is being offered with a bunch of strings attached in terms of priorities for public safety usage, build-out requirements, and other limits. The Frontline folks were heavily engaged in the regulatory processes at the FCC creating the D Block requirements. Last week the company concluded it didn’t have enough financing to go into the auction, so it closed up shop. (Grant Eskelsen at the Progress and Freedom Foundation says the failure of Frontline should be no surprise, and hopes it will be the “end of what has been a tragically flawed experiment in the D-block from the outset.”)

What happens if the auction is a bust? The reserve prices adopted for each block are: Block A – $1.8 billion; Block B – $1.37 billion; Block C – $4.6 billion; Block D – $1.33 billion; and Block E – $900 million. If the reserve prices for blocks A, B, C, and/or E are not met in the auction, the FCC will close the auction for that block and set a new date to auction the unsold spectrum. According to this summary of the FCC auction rules, the new auction would use the same reserve prices as before, but the FCC may alter performance or access requirements imposed on the winners. The new auction would have to begin within a few weeks of the conclusion of the first auction.

According to the FCC rules, “If the reserve price established for the D Block of the 700 MHz Band is not satisfied by the results of Auction 73, the Commission may decide to re-offer that license subject to the same service rules or reconsider the rules applicable to that block.” The WSJ reported yesterday that the FCC could give the spectrum to the highest bidder even if the bidder didn’t reach the $1.33 billion reserve. Silicon Alley Insider suggests that some interesting gaming may result.

Congestion fees coming to airports?

Michael Giberson

The Federal Aviation Administration is proposing to change its policy toward landing fees to “provide greater flexibility to operators of congested airports to use landing fees to provide incentives to air carriers to use the airport at less congested times or to use alternate airports to meet regional air service needs.” As explained in the notice issued by the FAA, the proposed policy change will not allow true congestion pricing, because they will not allow airport authorities to charge prices sufficient to balance demand will capacity without regard to “allowable costs of airfield facilities and services.” Instead, the FAA is proposing to allow airports to re-shuffle currently allowed costs in ways which reflect congestion at airports.

However, the proposal would clarify existing policy that allows airports to charge “dual element” landing fees. Most airports rely on a single element weight-based landing fee. The notice explains that an airport’s fees could be revised to incorporate both a per-operation component and a aircraft weight component “so long as the two-part fee reasonably allocates costs to the appropriate users on a rational and economically justified basis.” Such a shift would at the margin tend to promote use of larger aircraft into the airport without any other changes in rates. The FAA said the presence of congestion would be one factor that could be taken into account in revising rates. In particular, the per-operation component of the landing fee should vary according to the times congestion is present, said the FAA, if congestion is used to justify the change in fees.

Any airport can switch to a two-part landing fee. The FAA is proposing two other changes that only congested airports would be permitted to use. One change is a proposed ability to add the costs of facilities under construction into current rates (at present airports are allowed only to charge for facilities in use). The second change would allow airport authorities operating multiple airports to shift some costs from uncongested regional airports into the fees charged by the authorities congestion airports. This second proposed change is subject to several limits generally intended to insure that users of the congested airport can benefit from the shift in traffic expected to follow a shifting in costs.

As the Washington Post reports, not all in the air travel business are happy with the proposal, but that reaction is not a surprise. Here at Knowledge Problem we have long favored the economically-sensible approach of airport congestion pricing. While the proposal may not be pure congestion pricing, it would appear to allow airports to make significant steps in that direction.

The FAA is accepting public comments on the proposal, see the FAA notice for details.

Extra credit topic: Research in networks suggests that congestion rents can in some cases flow to non-congested network elements. Think, for example, of a generator connected to a high demand area by a congested line. Rather than the transmission line capturing all of economic rents, the generator may find it can profitably raise its rates and capture some congestion rents itself. The idea suggest the possibility that airports with departures headed into congested airports might find a way to extract some of the possible rents. Of course, that would require a little strategic sophistication on the part of airport rate authorities, and given the reactions reported in the Post‘s story it seems that airports are not exactly excited about using the modest amount of rate flexibility they already have.

Regulation of networks when networks cross political borders

Michael Giberson

The New Jersey experience illustrates one other key insight into regulation of a network. In a network industry such as electricity, where the network extends across state lines, it is possible for one state to exert significance externalities on others. The siting of transmission lines or an electricity generator in one state can alter supply conditions in other states. Moreover, if transmission is natural monopoly, one has to decide how to pay for it. Attempts by one state to pay less could increase the burden on other states. It is not obvious that the optimal geographic scope for unified regulation necessarily follows state or country boundaries.

That’s from “Mergers in Regulated Industries: Electricity,” by Dennis Carlton of the University of Chicago, currently serving as the Deputy Assistant Attorney General for Economic Analysis. As the title of the paper indicates, the subject is primarily merger analysis in electric power markets. Carlton uses the abandoned merger between Exelon and PSEG for illustrative purposes. The “New Jersey experience” he refers to is the inability of the merging companies to sufficiently satisfy regulatory demands made by the state.

While a now-abandoned merger proposal may in itself be of little interest, the more general issue of mergers in network industries remains important. What’s more, the question of appropriate policy for networks crossing political borders will only become more important as the efficient size of networks grows larger and larger.

(HT to the Antitrust & Competition Policy Blog.)

At the intersection of prediction markets and basketball tournaments

Michael Giberson

The NCAA basketball season is well underway, and soon enough March Madness will be here. Do you have your brackets worked out yet?

Last year while working out a few thoughts on arbitrage opportunities in basketball tournament prediction markets at Inkling, it occurred to me that the Inkling pricing mechanism was just a little bit off for such applications. The question is whether something better can be done. An answer comes from the folks at Yahoo Research: yes.

This is a long post likely only of interest to prediction market geeks, a few computational theorists and some mechanism design people. You have been notified.

Continue reading

Economists do not understand the opposition to congestion pricing

Michael Giberson

A few recent news articles on congestion has Peter Klein at Organization and Markets asking, “Why the Resistance to Pricing?

When the quantity demanded exceeds the quantity supplied — causing shortages, delays, congestion, misallocation — the solution is to raise the price. Every freshman economics student knows this. Why, then, are regulators, industry groups, and consumer representatives so often opposed to rationing by the price mechanism?

Klein offers two examples, the airport congestion issue (citing a Reason Foundation commentary and my blog post of last week) and a Wall Street Journal story on internet congestion. In the case of pricing proposed to help clear airport congestion, Klein draws upon the quote I used from the Air Transport Association, “We are unalterably, adamantly opposed to it.” From the Wall Street Journal article on internet congestion, Klein notes the extensive interest in technological solutions — bigger, better, faster, more. “All purely technological remedies. No mention of pricing,” he says.

Scott Wallsten riffed on the same topic in a commentary in response to news report that internet service provider Comcast was sometimes limiting capacity usage by customers who use file sharing services:

While this story immediately degenerated into a fight over net neutrality, economists’ ears should have perked up. If network traffic needs to be “managed,” then something is probably wrong with prices. Getting prices right–by charging heavy users for the costs they impose on everyone else, for example–would go a long way towards reducing the need to manage the network.

Wallsten draws on analogies to road use, electric power, and water utilities, to suggest that rates for high-speed internet use could be priced by some mechanism other than a flat access fee. “Consider highways. … Policymakers have generally tried to deal with congestion by building more roads” — the technological solution rather than pricing. Pricing proposals to address congestion, like HOT lanes, often face opposition even from parties would be benefit from faster travel.

Klein asks, “Is [the opposition to pricing] simply Bryan Caplan’s anti-market bias? Is it interest-group politics? Or is there something specific people don’t like, or don’t understand, about prices?”

It is possible that any proposed price will make some people worse off, possibly almost unavoidable, so some part of any opposition may be simple self-interest. But I think there may be a deeper phenomena at work, in Klein’s words, “something specific people … don’t understand about prices.”

People naturally understand the allocative function of prices — the paying you X so I can get Y — but have a harder time understand the coordination function provided by prices — the paying you enough X so that other people don’t take all of the Y first. Particularly when the value of the coordination function varies dramatically over time (rush hours, peak loads, high season at vacation spots), it seems harder to grasp the abstract service of coordination provided by prices.

Maybe there is work in the behavioral economics literature about congestion pricing, or maybe some sophisticated economics experiments have teased out these differences. I don’t know, but if not it seems like a promising research topic: Why the Resistance to Prices?