Simplifying spectrum trading

Summary

Summary

Introduction

1.1 Spectrum trading promotes innovation and growth by opening up opportunities for businesses to gain access to the radio frequencies that they need. This document consults on proposals to streamline the trading process to make the spectrum market more dynamic and efficient. As a result, we expect consumers to benefit from earlier introduction of new services and enhanced competition.

1.2 This consultation will be of interest to any organisation that engages, or wishes to engage, in spectrum trading, whether or not this is its main business activity. It will be of particular interest to organisations that already, or would like to, operate as 'band managers', ie to carry out, on a commercial basis, the trading of the rights to the radio frequencies for which they hold Wireless Telegraphy ('WT') licences having planned the assignments to end-users. It is particularly relevant to the band manager we are establishing with obligations towards programme-making and special events ('PMSE').

Background

1.3 Spectrum trading allows spectrum to be transferred through the market to those that can generate the greatest benefits for society and so helps secure optimal use of the limited and valuable spectrum resource. We introduced spectrum trading in the UK at the end of 2004 as a key element in our programme of market-based reform. Since then, we have progressively extended trading to a broader range of licences and plan to continue doing so.

1.4 Features of the present spectrum trading regime may be imposing unnecessary regulatory burdens. We have a statutory duty under section 6 of the Communications Act 2003 (the 'Communications Act') to keep regulation under review to avoid imposing unnecessary burdens or maintaining burdens that have become unnecessary.

1.5 Trading processes that are excessively burdensome impose transaction costs on stakeholders and may either prevent or delay trades. This is likely to have a negative impact on spectrum users and consumers.

1.6 Band managers can play a useful role in helping the spectrum market function more efficiently, offering end-users an alternative source of spectrum to Ofcom.

1.7 In particular, we are establishing a band manager as the means by which PMSE users will access spectrum in future. This licensee will operate under a licence that, among other things, will oblige it to meet reasonable demand from PMSE users on fair, reasonable and non-discriminatory terms. So long as these obligations were met, it would be able to allow others to make use of its spectrum. (Such obligations do not apply to other licensees who engage in spectrum trading.) The way in which the band manager allows users access to its spectrum has to be sufficiently dynamic to handle upward of 90,000 requests for PMSE access a year, often arising unpredictably, at short notice and outside office hours. The current trading regime is not sufficiently flexible to support this type of operation.

1.8 Models for band manager operations rely on the spectrum trading process. The current process may be unduly onerous or require complex contractual arrangements that add to transaction costs and deter trading activity.

The current spectrum transfer process

1.9 Spectrum transfer is governed by section 30 of the Wireless Telegraphy Act 2006 (the 'WT Act') and the regulations made under it. The Wireless Telegraphy (Spectrum Trading) Regulations 2004 ('the Trading Regulations') specify the basis on which a licensee's rights to use spectrum may be transferred. Section 30 of the WT Act and the Trading Regulations give effect to Article 9 of the EU Framework Directive 2002/21/EC ('the Framework Directive').

1.10 The Trading Regulations specify a six-stage process for executing trades. This involves:

• notification to us;
• publication by us of certain details of the proposed transaction before it takes place;
• a decision by us whether to consent to the trade;
• notification of the parties of our decision
• processing and issue of WT licences to the parties. In particular, a transfer is put into effect through the surrender of the existing licence and our granting new licences; and
• publication of details of the trade after it has taken place.

1.11 This framework may be excessively cumbersome, particularly for transactions that are high-volume and (individually) low-value as for PMSE. There are indications that the resulting delay and costs may be impeding the development and operation of band managers and the spectrum market more generally. The main contributory causes appear to be:

• the need under present legislation for us to:
  • be notified of, and consent to, intended trades; and
  • replace existing WT licences with new ones in order to put transfers into effect;
• uncertainty about how the legislation applies to certain spectrum business models and the commercial risk that contracts may be declared void by the courts; and
• lack of a simple process for time-limited trades, that is transactions intended to be of limited duration, at the end of which time the spectrum rights revert to the original holder.

Our proposals for consultation

1.12 We have analysed the trading process in the context of the applicable EU requirements and believe that it could be streamlined to remove unnecessary regulatory burdens without compromising effective spectrum management and while remaining compliant with EU obligations.

1.13 Specifically, we are consulting on whether the framework should be simplified for most licence classes by amending the Trading Regulations to omit the requirement for the parties to obtain our consent. However, trading would still not be allowed in certain specified circumstances, such as if licence fees were outstanding or licence revocation or variation proceedings were in progress. The streamlined process would consist of the following stages:

• the parties would notify us of their intention to trade;
• we would publish information about the proposed transaction;
• the transfer would be put into effect by the surrender of the existing licence and by our granting new licences; and
• we would publish information about transfers that have been completed.

1.14 The need to obtain our consent would still be imposed on a selective basis for individual licence classes for which we considered it necessary and proportionate, but it would no longer be a blanket requirement.

1.15 We also propose to revise the Trading Regulations to make time-limited transfers more straightforward.

1.16 We further propose to introduce a variant of spectrum transfer under which transfers could proceed without the surrender of existing licences and our grant of new ones. Under this new process, the original licensee might agree with a transferee to share the rights to use the spectrum for a defined period of time. But the original licence would not be surrendered, nor would the transferee be issued with its own licence document. Instead the transferee would have rights to use the spectrum by virtue of an undocumented licence that has arisen as a result of the transfer. At the expiry of the agreed period, the rights of the transferee would naturally expire, again becoming the exclusive rights of the original licensee. We call this 'transfer without licence issue' ('TWLI'). It could be introduced by making regulations under section 30 of the WT Act.

1.17 Like all transfers, those undertaken under TWLI would need to comply with the relevant requirements of Article 9 of the Framework Directive, which means that they would need to be notified to us and that we would need to publish details of them when they had taken place. However, by removing the need for transfers to be put into effect through surrender and reissue of licences, TWLI would enable transfers to occur more quickly and efficiently. At this stage we propose that TWLI would apply only to transfers by the band manager with PMSE obligations.

1.18 We also explore further changes that we could make once the Framework Directive is amended as currently planned to allow spectrum leasing. In this document, 'spectrum leasing' is a process that would allow a licensee to authorise another person to use the spectrum for a time-limited period under an expedited trading process. It would avoid the need for us to be notified and to publish details of transactions and to issue a licence to the end-user. In short, spectrum leasing is a form of time-limited spectrum trading that relies solely on the contract between the parties. At this stage, we envisage that spectrum leasing might apply to transactions that are intended to last for periods of up to 24 months. This would provide a more dynamic alternative to the current trading model and facilitate new market developments. It would give licensees greater flexibility to carry out trading transactions in the way that best suits the parties and would seem particularly suitable for high-volume, individually low-value transactions such as for PMSE. Leases for periods longer than 24 months might also be possible but might be subject to additional procedural requirements in view of their potentially greater impact.

1.19 We propose that the leasing process would, like the process for transfers, be subject to regulation by us. For example, we would want licensees to be required to keep records of those to whom they have leased their spectrum rights and to make these available to our authorised personnel so that they may investigate interference.

Future changes to the EU legislative framework

1.20 Any changes we make will need to comply with the EU Framework Directive, which requires transfers of spectrum rights to be pre-notified to the national regulatory authority ('NRA') and made public.

1.21 The Framework Directive is in the process of being amended as part of the review of the EU framework for electronic communications networks and services ('the Framework Review'). One of the expected changes to the Framework Directive would distinguish spectrum leasing from spectrum transfer with a significantly simpler procedure for leasing than for transfer. Spectrum leasing forms part of our proposals. However, certain aspects of the Framework Review (unrelated to spectrum management or transfers) are still under negotiation and, consequently, it is not currently known when or if it will be possible to introduce spectrum leasing.

1.22 On best-case assumptions, it might be possible to introduce spectrum leasing on a timescale broadly in line with the currently expected start date of operation of the band manager with PMSE obligations. On the other hand, there could be a considerable delay. In that case, as TWLI would offer some of the advantages of spectrum leasing and would be consistent with the current framework, we might introduce it on an interim basis.

Matters on which we seek views

1.23 This document seeks evidence on whether the present regulation of spectrum trading is impeding desirable market developments or imposing disproportionate transaction costs and on specific proposals for removing unnecessary regulatory burdens. Specifically, we seek views on proposals to streamline the current regime by:

• removing the need for the parties to obtain our consent to transfers of licence rights and obligations;
• allowing time-limited trading without the need for a separate closing transfer by the parties;
• introducing a variant of spectrum transfer that could proceed without the need for us to grant a new licence document to the transferee; and
• introducing, when the Framework Directive is amended, a faster and more efficient spectrum leasing process.

Next steps: timing and phasing

1.24 We envisage that the details of the processes for both TWLI and leasing, would be specified in regulations made by us. If we decide to proceed in the light of responses to this document, we will consult further on regulations to implement the changes and indicate the timetable for implementation. We would aim to institute the changes in time for the band manager with PMSE obligations to start operating in summer/autumn 2010 .

1.25 Depending on the outcome of this consultation and progress of the review of the EU framework, we would aim to introduce spectrum leasing following amendment of the Framework Directive. We are considering with the Department for Business, Innovation and Skills (BIS) whether changes to the WT Act would be necessary. Meanwhile, the introduction of TWLI could enable some of the benefits of leasing to be realised sooner.