Some Details Of The Proposed Auction Procedures

Professor Binmore’s paper (BFWACG(00)25) sets out the main features of the auction of spectrum at 28 GHz which the Government intends to run in September. The present paper gives more detailed information on some important aspects of the auction design. Both papers will be discussed at the Consultative Group meeting to be held on 9 June (which replaces the one that had been scheduled for 30 May). We are grateful for the comments submitted on Professor Binmore’s paper, which we are examining – further comments are welcome. We would also welcome comments on any points in the present paper. Comments should be sent to the Agency by 14 June, by e-mail to joe.sonke@ra.gsi.gov.uk.

2. The activity rules are designed to ensure that the auction proceeds at a reasonable pace, which allows bidders to make a proper assessment of their options but does not allow bidding activity to fall to such a level that the auction would be unduly prolonged.

3. A bidder may be active in a region (i) if he holds the highest bid on one of the licences in a region; or (ii) if he makes an acceptable bid on one of the licences; or (iii) if he exercises a waiver.

4. At the beginning of the auction each bidder will declare the number of regions in which he intends to bid for a licence. This is his initial quota. This quota will diminish as the auction proceeds unless the bidder maintains the level of activity determined by the auctioneer throughout the auction.

5. For each round a percentage activity level factor will be specified. If a bidder’s activity falls below that level in the current round his quota for the succeeding round will be reduced. This new quota will be the bidder’s actual activity level in the current round multiplied by the reciprocal of the required activity level. (Some examples are shown below.) It is important to note that where the activity level percentage results in a required activity level that is not a whole number, the bidder should round this number up to determine the minimum activity level that will result in his quota remaining the same in the next round. When determining his quota for the next round, if the product of the actual activity level and the reciprocal of the activity level factor is not a whole number, this number is rounded down.

6. The Agency expects the activity level factor to be in the range 50% to 80% in the early stages of the auction, increasing to, say, 80% or 90% as the auction progresses and finally reaching 100% as the auction reaches its final stages.

7. The auctioneer will retain the discretion throughout the auction as to when to increase the activity, for example if new bids are placed on a low percentage of licences and the auction appears to be stalling. We intend to give bidders notice of any increase at least three rounds in advance.

Example two – A bidder has a quota of 8. The activity level factor is 80%. He bids on 4 regions in the current round (2 below the minimum permitted). His quota is reduced to 5 for the succeeding round.

Example three - A bidder has a quota of 3. The activity level factor is 100%. he bids on 2 regions in the current round (1 below the minimum permitted). His quota is reduced to 2 for the succeeding round.

8. The auction will be run as expeditiously as possible but bidders will need to have sufficient time to consider their activity between rounds. For example - after the early rounds, when bidders are familiarising themselves with the process, we might expect thirty minutes to be allowed for bids to be submitted once a round has started, and an hour to be allowed between rounds: this would mean that five rounds or so could be completed each day.

9. Each bidder will be allowed a limited number of opportunities to exercise a waiver rather than submit a bid on a licence. At present we are considering allowing each bidder six waivers during the auction.

10. Bidding will take place on all normal business days, i.e. excluding weekends and bank holidays. The auctioneer may notify bidders that he is calling a recess day, which will be a business day during which no bidding takes place. We are considering whether each bidder should be entitled to request a recess day for reasons of force majeure which prevent him from submitting bids on the relevant day.

11. The auctioneer will specify at the beginning of each round the maximum and minimum bids that may be submitted on each licence. In the first round the maximum bid will be 150% of the reserve price on a licence. In subsequent rounds it will be 150% of the minimum bid specified for a licence. The minimum bid will be decided by the auctioneer in the light of the degree of activity at any one time – up to a maximum of 115% of the current highest bid on a licence.

12. In the event that there is a tie for the current highest bid on a licence the bidder deemed to hold the highest bid will be the one whose bid was submitted and accepted earliest.

13. In the first round the minimum bid will be the reserve price. The reserve price will be the same for each licence in a region, but it will vary between regions. The Agency proposes that the reserve price for each licence in a region will be as shown below:

The final make-up of regions may vary from this but we would not expect the level of reserve prices illustrated above to change significantly.

14. In order to pre-qualify, the Applicant will have to satisfy the following tests:

(i) the holding of a Licence by that Bidder would be prejudicial to the interests of national security; or

(ii) the Bidder would not be a fit and proper person to hold a Licence.

15. On submission of applications and as a condition of pre-qualification bidders will be required to provide an initial deposit. Additional deposits will be required during the course of the auction as the value of each bidder’s aggregate bids increases (as explained below). In the event that the bidder is successful in the auction the initial and additional deposits (plus interest but after the deduction of any penalties (see para. 20 below)) will be offset against payment for the Wireless Telegraphy Act licence. If the bidder is unsuccessful the deposits (plus interest) will be returned to him, after the deduction of any penalties.

16. The initial deposit will be at least 20% of the aggregate reserve prices of the licences on which a bidder intends to bid in the first round.

17. Additional deposits will be required during the course of the auction. These will be calculated as 20% of his aggregate bids - the sum to be deposited will automatically ratchet up as the value of each bidder’s aggregate bids increases.

18. Bidders may submit additional deposits on submission of applications or at any time during the auction. Until an appropriate additional deposit is received a bidder will not be permitted to bid. Bidders will therefore need to ensure that at any time they have deposited sufficient sums to cover their planned bidding activity in the future rounds. This applies to the first round, as well as succeeding ones: deposits prior to the first round will need to cover the reserve prices for licences in each of the regions on which a bidder intends to bid. How far in advance they need to deposit additional sums will be a matter for their own judgement: it would seem prudent for deposits to be sufficient to cover bids likely to be made at least during the following few days.

19. A bidder’s deposit may be forfeited in full or in part if he breaches any of the auction rules covering such things as the submission of false or misleading information and non-collusion. He may also be excluded from the auction.

20. There will be provision for minor penalties to discourage bidders from committing minor misdemeanours or attempting to gain advantage by disrupting the auction. £10,000 may be deducted from a bidder’s deposit, at the end of the auction, in each case. If a bidder is subject to nine such penalties the sum will be increased to £20,000 for each subsequent case.

21. Successful bidders will be able to choose whether to pay the licence fee either in full on grant of the WT Act licence or to pay 50% on grant of the licence and the balance on the sixth, seventh, eighth, ninth and tenth anniversaries of the date of granting. Where instalments are chosen interest will be payable and a bank guarantee will be required.

Auction software

22. The auction software will take the form of an applet, which means that no software is downloaded to a bidder’s PC. This application will allow the submission of bids, together with a variety of reporting functions to inform bidders of results of previous rounds and details for the next round.

23. Each bidder will need a standard desktop PC, running Windows 95, 98 or NT, which must have a modem or ISDN connection installed. Each bidder will be given a telephone number to connect to the main server. Once the PC is connected, the bidder will type in a web-site address, which will bring up a form asking for their username and password. This will allow them to log in to the main application.

24. Once in the application and a round has been set up, the main screen will appear with a countdown to the start of the next round.

25. Prior to the start of the round, reports will be accessible to inform the bidders of the minimum bids on each of the licences.

26. The bidding screen will be made available once the round start time is reached and will be disabled when the end time of the round is reached. Once bids are submitted, a password verification will be used to further ensure that the bids have been made by the correct bidder.

27. At the end of the round, further reports will be made accessible, which will describe the activity in the previous round. This process will then continue until the end of the auction. In addition a file in machine readable form will be downloadable from the application or from the auction website.

28. The communication method used for the auction software is highly secure as the system can be set up to only allow specified telephone numbers to connect to the server. In addition, whenever a bid is submitted, the bidder will be asked for a password. This password will be taken from a printed list, which will be couriered to each bidder prior to the start of the auction. There is also the standard practice of logging on with a password and username to a server whose name is known only to the bidders involved in the auction.

RA
5 June, 2000

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