CBO Scores The Senate Spectrum Bill (S.911): No Spectrum Pots of Gold — Really.

Last week, the Congressional Budget Office (CBO) issued its “score” (how much a bill will cost or earn for the U.S. Treasury) for S.911(aka The Rockefeller/Hutchison spectrum bill). CBO estimated that all spectrum auctions proposed in the bill — incentive auctions, new federal spectrum, and generally extending the FCC’s spectrum authority — would net $24.5 billion. After expenses, including reallocating the D Block to public safety, the bill ended up netting only $6 billion for deficit reduction, disappointing supporters who had promised $10 billion in deficit reduction. More importantly than the revenue, however, the CBO explanation of the score highlighted the following for anyone who actually read more than the bottom line:

  1. We have no way to predict what an incentive auction will actually make, and have a lot of doubt this will work;
  1. We don’t believe you can get more good spectrum (the kind that fetches billions of dollars) out of the federal government;
  1. Trying to do spectrum policy right is very expensive.

For various reasons, however, CBO doesn’t come right out and say this in the same bold way I just did above. Instead, they drop little dollops of wisdom in the text, which requires a certain amount of decoding from Washington Weasel speak. Happily, I brought my Weasel Word Decoder (don’t come to Washington without one!).

CBO score decoded below . . . .

These days, life in Washington DC revolves around the scores given to bills by CBO.  For those unfamiliar with this Washington institution that pretty much controls the fate of the nation these days, CBO computes the projected financial impact of any piece of federal legislation. Even under normal circumstances, members of Congress want to show that their programs that spend money will not cost nearly as much as opponents say and that their proposals for generating money will earn more than opponents could possibly dream. In these times, when debt reduction has become the Washington obsession, a good CBO score is critical to a bill surviving.

This creates a typical Washington paradox. On the one hand, everybody wants CBO to be scrupulously honest, because we absolutely need these numbers to work if we want to avoid being in an even deeper financial hole. On the other hand, everyone is convinced their bill deserves all manner of special treatment. And when Congressional leadership are utterly convinced their bills ought to ring up a particular score, it can get very, very ugly.

The result is that CBO (like its companion agency, the Government Accountability Office), has become quite adept at the Way of the Weasel. Usually, CBO speaks the truth and damn the consequences. But when powerful interests are at play, it gets a shade more weasely. Here, Congressional leaders insist we can get between $20-$25 billion from spectrum auctions, so auction money CBO shall find. However, because the creators of CBO wove a truthspell into its foundation in the dawn of time when we cared vaguely about reliable budget numbers, CBO is still compelled to tell the truth about its estimates.

Which brings us to today’s exercise in decoding the Way of the Weasel to see what CBO’s budget estimate actually tells those willing to stare truth in the face.

Incentive Auctions Will Not Raise Even  $25 Billion.

It’s important to note that CBO does not come up with a score for incentive auctions alone. The $24.5 billion comes from the total of (incentive auctions) + (auctions of designated federal bands) + (generic bonus for extending the FCC’s general auction authority another ten years). Given that, one might think that $24.5 billion seems on the low side, especially given the much higher numbers some folks keep insisting on throwing around for incentive auctions alone.

However, as I keep saying, figuring out auction revenue is not as simple as assuming that you can get prices similar to what you got last time and imagining how much you want to sell.  Indeed, a read through the actual CBO text makes one wonder how the heck CBO reaches $24.5 billion instead of something a heck of a lot smaller.  For all the world, it looks like CBO combined all possible sources of revenue together to create an average probability that could reach the needed $24 billion without needing to show clearly how unlikely any particular source of revenue really is.

How Much Spectrum Will We Get To Auction? Turns Out, Not All That Much.

The CBO text mirrors a lot of what I have said before about how we cannot really predict how many broadcasters will participate in the incentive auctions and how much we will have to pay them to give up spectrum. Here is the money quote (if one will pardon the pun) from page 4 of the CBO Report:

It is difficult to predict how much spectrum would be auctioned by 2021 because of the time and cost involved in moving existing users. For example, the amounts auctioned as a result of incentive auctions would depend on the willingness of two satellite licensees and dozens of television broadcasters to sell their existing spectrum rights at a price that is below the market value of their licenses. (emphasis added)

 

Lets run this through the Weasel Word Decoder. [bleep, bloop] Translation: we might as well base our budget hopes on the likelihood that leprechauns will leave us pots of gold if we put out saucers of milk. CBO is perhaps too polite to point out the likelihood that satellite and broadcast licensees will “sell their existing spectrum rights at a price that is below market value” is slim to none. Worse, as I keep pointing out, we need maximum participation in the top markets, i.e., the most profitable markets where it will cost the most to entice broadcasters to give up spectrum, in order to clear sufficient bands on a national basis. I continue to stand by my conservative estimate that at least three full power broadcasters in each of the top 10 markets must actually exit the field (i.e., stop broadcasting altogether) and not merely accept a doubling up situation or other reduction in spectrum rights, to make this even vaguely worth doing. That will not come cheaply, if at all.

Getting Federal Spectrum Is Not So Easy.

S. 911, and all the other spectrum bills for that matter, also identify a bunch of federal spectrum bands for auction. Congress orders NTIA to clear this stuff right now, no excuses, get busy. Unless, of course, the President certifies that it is absolutely and utterly essential that we retain it for National Security. So, with Congress ordering the Feds to clear the spectrum for auction, that will absolutely positively happen, right? Money in the bank, right?

 

Not so much. I have noted before how hard it will be to get more spectrum out of the Feds, and CBO is none too optimistic about getting more federal spectrum, despite Congress designating specific bands for auction. In fact, CBO kinda doubts we’ll ever see that spectrum and, if we do, clearing it will cost several squindoodles. Here’s the quote from page 4:

Similarly, DoD and other federal users cannot relinquish their current assignments until they are given alternative frequencies, which also may require moving some commercial licensees to different frequencies. Past experience suggests that relocating federal and commercial users can be very costly and take many years to complete.

CBO also assumes “that much of the spectrum used by federal agencies identified in the bill would not be available for commercial services until after 2021.”

Fire up the Weasel Word Decoder again. [bleep, bloop] Here we go: ‘We don’t think you can get DoD or other federal agencies to clear the spectrum any time soon, so we need to discount the score for the auction of this valuable federal spectrum by the likelihood you will actually get your hands on that spectrum to auction and how much of the auction revenue you will need to spend on moving federal users rather than giving to the Treasury to reduce the deficit. The numbers are so bad we would rather not state them plainly. But trust us on this one, there is no pot of gold in federal spectrum.’

So How Do We Get Any Money?

CBO concludes that, taking everything together, the NTIA and FCC can scrape together for auction between 150 MHz and 220 MHz in the sweet spot below 3 GHz (of which the FCC already has 35 MHz from the AWS-2 and AWS-3 bands). CBO assumes that some spectrum reclaimed from broadcasters would go to unlicensed use, which seems [wildly optimistic to me at the moment]. More importantly, this statement is rather at odds with CBO’s previous statement that it cannot predict how much spectrum an incentive auction will free up. Under S.911, the FCC cannot begin to even think about allocating spectrum to unlicensed unless it first auctions 84 MHz. So I’m inclined to view this as Weasel Word for “we want to make it look like you could do something to enhance revenue, but really it’s just baloney. But we’ll go ahead and blame unlicensed anyway without providing any evidence or support for the idea that unlicensed creates an actual revenue loss.”

Next CBO estimates the value for this undifferentiated lump of spectrum NTIA and FCC can identify as about 70 cents MHz/pop (if you don’t know what MHz/Pop is, don’t worry – just treat it as the arbitrary number by which we measure the value of spectrum at auction). Auction enthusiasts will no doubt complain this is far too low, particularly for broadcast spectrum recovered at incentive auction, and will insist that CBO’s estimate is much too conservative that – really, really – there is a huge pot of gold just waiting for us at the end of the spectrum auction rainbow.

Time to break out the Weasel Decoder to explain why CBO is not being too conservative at all. As CBO explains on page 5, the 70 cents MHz/Pop is the weighted average for *all* spectrum it expects the FCC to auction. This is how CBO deals with the fact that it can’t predict how much spectrum will come from where. CBO took the “weighted average” for all good spectrum sold at auction from 2001-2011, which includes the AWS-1 and 700 MHz auctions auction enthusiasts rave about as setting the bar for auction revenue, and comes out to a weighted average of  80 cents MHz/Pop. So the estimate for total, aggregate spectrum is roughly equivalent. The decline of 10 cents MHz/Pop, in CBO’s words, “reflects expected differences in the quality and quantity of spectrum expected to be auctioned.” Which goes back to the first point. CBO really doesn’t expect the FCC to recover much high quality Federal spectrum or broadcast  spectrum from incentive auctions – at least not without paying a hefty price to compensate broadcasters and move federal users.

So What’s The Bottom Line?

The bottom line here in a sensible universe is that CBO would explain that they really can’t score the spectrum auctions because they have too many unknowns, and Congress should focus on finding the best policy outcome rather than treating the foundation of our digital future as a piggy bank. But if we lived in a sensible world, we would not be sitting here on the brink of default betting that broadcasters, in the words of CBO, “sell their existing spectrum rights at a price that is below the fair market value of their licenses.” Frankly, I would almost rather we resort to leaving at bowls of milk and having CBO score the gold the friendly leprechauns will leave us from their vast horde at the end of the spectrum rainbow.

Stay tuned . . . .

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