Saving Millions from Spectrum Sales
January 15, 2009
by Diana Furchtgott-Roth
As President-elect Obama and his chief performance officer Nancy Killefer, formerly of McKinsey & Co., ponder how to make government more efficient, they could cast an eye on almost any federal agency and find savings for the American taxpayer.
One example is the Federal Communications Commission, which is failing to earn hundreds of millions of dollars annually for the taxpayers by undercharging for the private use of parts of the radio spectrum, notably the frequencies used for the links between cell phone towers and the integrated telephone network.
Congress and the incoming president are thinking of spending billions of dollars on economic stimulus, so saving a few hundred million may not sound like much. But, to paraphrase the late Illinois Republican Senator Everett Dirksen, a few hundred million here and a few hundred million there and pretty soon you’re talking about real money.
The FCC makes money by leasing without competitive bidding high-frequency bands of the electromagnetic spectrum. Had the FCC auctioned off this spectrum to the highest bidders beginning over a decade ago, it would have generated hundreds of millions of dollars a year for the Treasury. Instead, the FCC chose to lease individual parts of these bands, known in the industry as “links.”
The FCC may have had a noble purpose in trying to develop the spectrum, but this is no longer necessary. Many large companies who paid millions of dollars when the FCC did hold auctions on other bands of spectrum then leased some of their spectrum to third parties profitably at market-rate prices.
Leasing high-frequency spectrum non competitively rather than auctioning it does not have to be costly to taxpayers, because the agency can charge market rates. However, the FCC has always priced the leases far below market rates.
For a point-to-point fixed wireless link, such as between a cell phone tower and a central telephone switching office, the FCC charges a one-time fee of $1,290 for a term of ten years. That is absurdly low. The market rate varies, but in some instances even in today’s recessionary climate it is $200 a month in a mid-size market (Las Vegas and Denver are examples), and $250 or $300 a month for major markets (New York and Chicago). Hence, at a minimum the FCC should increase by 20-fold its one-time charge for a 10-year link.
Beneficiaries include Sprint, AT&T, and Verizon. These and many other companies are building their networks with subsidies from the American taxpayer because they are paying pennies for valuable infrastructure.
Such pricing could be remedied immediately, without legislation. The best solution would be to auction off either all of the spectrum in the high-frequency bands or the links. But if the FCC cannot organize an auction because some 10-year leases on parts of the spectrum have already been issued, at least it should raise its pricing to the range of $24,000 a link for a 10-year period, or $12,000 a link for a five- year term.
Since there are now over 60,000 active links and new links are growing by almost 18,000 a year, the increased annual revenue realized by the government would likely be in hundreds of millions of dollars.
Congress and the new administration are focusing on broadband deployment as part of its new infrastructure stimulus package, but broadband deployment should not be based on undervaluation of government spectrum.
The Obama team is looking for money to save as well as for money to spend. Memo to Killefer, the new efficiency czar: Charging full price for spectrum is one place to start.
This commentary appeared in Reuters.com on January 15, 2009.
Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, was a Senior Fellow at Hudson Institute from 2005 to 2011.
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