In this report, NERA Vice President Christian Dippon finds that the advanced wireless services (AWS) spectrum auction completed by Industry Canada in July 2008 may have been distorted by the insertion of incompatible regulatory goals into the auction process. Mr. Dippon’s report was authored for Canadian telecommunications company TELUS and submitted to Canadian regulators. His analyses determined that overall revenue from the auction exceeded the average predicted value by 138 percent. Mr. Dippon found that the most important reason for this was arbitrage opportunities in the auction design generated by the regulator’s decision to set aside 44 percent of the available spectrum for “entrants,” which, as defined, were all qualified bidders, except for the three largest incumbent mobile operators.

The report concludes that regulators need to carefully balance the costs and benefits of regulatory intervention. Most importantly, they should try to minimize the side effects of any regulatory intervention. If they believe that market forces are not working properly, however, and regulatory intervention through preferential treatment of some bidders is necessary, they should take steps to limit benefits to actual market entrants and should focus on benefits that apply after the auction (such as tax incentives) rather than before it (such as set-asides).