Applying spectrum pricing to the Aeronautical sector - a second consultation

Summary

Summary

The purpose of this consultation document

1.1 In this document we set out revised proposals for the application of Administered Incentive Pricing ("AIP") to certain aeronautical uses of the radio spectrum. Specifically, we are proposing to apply revised Wireless Telegraphy Act licence fees ("fees") to the use of aeronautical VHF communications frequencies in the band 117.975 to 137 MHz.

1.2 We are proposing to introduce these changes no earlier than the last quarter of 2010. However, we are proposing to phase in some of the changes over up to five years to minimise avoidable disruption to the aeronautical sector and to enable regulatory authorities to monitor and respond to any unforeseen consequences.

1.3 Some fees will not change:

• We are proposing to apply AIP only to particular VHF spectrum used by ground stations (typically aerodromes and air traffic controllers). However, we are not proposing fees for the distress or fire frequencies.
• We are making no proposals to apply AIP to aircraft radio licences or to the spectrum used by radars and navigational aids.

Why we are making these proposals

1.4 Spectrum is a finite resource, in that the use of spectrum for one purpose denies its availability to other users. Demand can sometimes exceed supply. AIP is intended to apply market disciplines to the holding and use of spectrum rights, by prompting users to consider their spectrum needs in light of the AIP fees payable. AIP is already paid by most private sector users of spectrum, except where upfront payments have been set at auction. Many public sector users, including the emergency services and the Ministry of Defence, also pay AIP.

1.5 The civil aeronautical sector is a significant contributor to the UK economy and its operations are dependent on access to radio spectrum. About 19MHz of spectrum (117.975-137 MHZ) are used for aeronautical VHF communications, which is the main focus of this consultation document. This spectrum is shared between military and civilian users.

1.6 Fees for the use of all aeronautical spectrum are currently set on a basis which contributes to the administrative cost of issuing the licences concerned. Consequently, powerful transmitters which prevent others from using the same spectrum over a very wide area, and transmissions used in ground to air communications with aircraft at high altitude, which require protection from other users over large areas of the ground, often attract similar fees to applications which have a much more localised impact and use much less spectrum. Also, licences to use spectrum in areas of high demand (for example in South East England where there are many aerodromes and denser air traffic patterns) attract the same fee as licences to use similar spectrum in remote areas with little or no demand from other potential users. We do not think this approach promotes optimal use of spectrum and our revised proposals are intended to reflect these factors in the

AIP fees payable.

1.7 It is important to note that AIP can improve the value that is obtained for society from a given amount of spectrum, compared with free licences or flat-rate fees, even where the spectrum continues to be used for the same application, but can be used by a different user in the same sector, potentially in the longer term.

1.8 Where spectrum is subject to excess demand in its existing use (as is the case with aeronautical VHF communications frequencies), there will be potential users who want to make use of that spectrum but currently cannot. In the absence of AIP, the price for using the spectrum does not equate to its value to society (its opportunity cost) and, therefore, (particularly over the long term) users may well hold onto more spectrum than they need once they have an assignment, because the cost to them is unrelated to the amount of spectrum they hold. Potential users who do not hold spectrum might have been able to produce more value from it than those who currently do hold it. If, in response to AIP, an existing user gives up some spectrum because that user values the spectrum at less than the AIP, and this is taken up by a new user who (necessarily) values it at more than the AIP, then it is reasonable to conclude that the value derived by society from using the spectrum has increased as a result of AIP.

1.9 As there is already excess demand and a shortage of spectrum, there are already opportunity costs in the short term. If this shortage is expected to persist and even grow in the longer term, the associated opportunity costs will also persist over the longer term. With increasing opportunities available to some users to respond to pricing signals effectively in the longer term, AIP is intended to provide sustained signals to assist in such efficient decision-making over time.

1.10 For the longer term incentive properties of AIP to operate to best effect, the aeronautical sector needs to be confident that future technologies and practices which enable more users, or more applications, to share a given amount of spectrum will result in lower unit AIP fees per user or application.

1.11 For example, we are proposing that, as and when 8.33kHz channels are deployed in place of 25kHZ channels, fees will be reduced pro rata. If it was possible to anticipate other technological changes or changes to technical standards which will have a specific measurable impact on spectrum efficiency, we would make fee Regulations to reflect these opportunities too. In practice, it is difficult to forecast what form other such efficiency improvements might take over the longer term and we cannot set out, at this time, pricing algorithms to apply to such future systems. Nevertheless, it is important to make very clear Ofcom's commitment to reducing AIP fees for applications which use less spectrum. Thus, where less bandwidth is needed for a particular application, or more users are able to share a given frequency band, or where an application impacts a smaller geographic area than previously, we will take steps to revise AIP fees to reflect and encourage the new efficiency opportunities concerned. We believe the sector should be capable of providing advance notice of such developments so that adjusted pricing incentives can be developed to the same timescales.

1.12 There will continue to be an important role, of course, for other UK and International initiatives which can help improve the way spectrum is used. Ofcom recognises that AIP is one of many tools which should complement each other in achieving better use of scarce spectrum resources for the long term benefit of citizens and consumers. We also recognise that the AIP fees being proposed may need to be refined in the light of experience. We have made significant changes to our proposals following the initial consultation last year

1.13 In July 2008 we published an initial consultation on applying AIP to the aeronautical and maritime sectors (the "July 2008 consultation"). In that consultation we set out some indicative fees for VHF communications frequencies. We also proposed potential national reference rates which might have formed the first building block of a structure for determining licence fees for radar and aeronautical navigation aids.

1.14 Following that consultation, we considered the responses from stakeholders carefully and in many cases we had subsequent follow-up discussions with licensees or their representatives. We have also held extensive discussions with Government and the CAA. We also commissioned further external consultancy, which drew on inputs provided by numerous stakeholders, and we considered the conclusions of this work in detail in drawing up the proposals in this document.

1.15 In response to detailed comments from stakeholders and as a result of this follow-up work, we have made a number of significant changes to the initial proposals in respect of aeronautical VHF communications frequencies outlined in the July 2008 consultation, including the following ;

• More detailed proposals reflecting the varied applications - Based on consultation responses, our consultants' work and discussions with the CAA, we note that the amount of spectrum used in the aeronautical VHF frequencies varies considerably depending on the type of application. In light of this, we consider that a simple single uniform AIP fee, covering all applications, is not appropriate. We are now therefore proposing a much more granular set of AIP fees, ranging from £75 to £19,800 per year depending on the nature of the applications concerned. These fees are intended to reflect the fact that some applications have a much wider geographic impact and accordingly use up more scarce spectrum in given frequencies than others, and some use more bandwidth than others.
• Geographic differentiation reflecting varied levels of demand - We are also proposing that some fees should vary according to the location of the transmitter. Fees for localised applications (i.e. excluding those which impact most of the UK) would be discounted by 20% in parts of the North and West of the UK, and by 50% in some parts of Northern Scotland. We believe this approach is more appropriate than the alternative of a uniform set of fees to apply across all of the UK.
• Multiple transmitters In the case of some specialist applications which rely on multiple transmitters using the same frequency, we consider it is not appropriate to apply a fee for each transmitter, as the total amount (and hence value) of spectrum used is not affected by the transmitter numbers concerned.
• Phasing in of larger fees increases. Reflecting the concern expressed by stakeholders, that large increases in fees could have unintended impacts on the aeronautical sector in the shorter term, we are proposing to phase in significant fee increase over up to five years. We believe this should give the sector and its regulator sufficient time to respond to changes efficiently and safely.

1.16 The resulting revised fee proposals for VHF spectrum are summarised in the following Table 1 and, more fully, in Sections 2 and 7 below. Fee marked with an asterisk (*) would be discounted by 20% in parts of the north and west and by 50% in the far north of Scotland. More detail is provided in Section 2 below.

1.17 We should emphasise two important aspects of these phasing proposals:

• They are for consultation: we welcome stakeholder feedback on the appropriate duration and profile of phasing to enable licensees to adapt efficiently over the timescales that are relevant for the sector;
• As the phasing period we propose is relatively long, there would be opportunity to assess the impact of fees during the phasing in period - and if appropriate adjust future fee levels where there is evidence that future increases would create risks of unacceptable impacts. In assessing such risks we would continue to draw heavily on the advice of sector stakeholders, including the CAA, with the appropriate industry operational knowledge.

Table 1 Summary of phased fee proposals

	Year 1	Year 2	Year 3	Year 4	Thereafter
Fire and Distress frequencies	£ zero	£ zero	£ zero	£ zero	£ zero
Sporting frequencies (generally unpowered flight)	£75	£75	£75	£75	£75
Offshore mobile stations	£75	£75	£75	£75	£75
Surface movement (OPC and AS) and Offshore fixed units	£350*	£350*	£350*	£350*	£350*
Aerodrome air traffic services (TWR, AFIS and A/G)	£400*	£800*	£1,300*	£1,900*	£2,600*
Approach services (APP), Automatic Terminal Information Services (ATIS), Area Control service (ACC), Aircraft Communications Addressing and Reporting System (ACARS), and VOLMET (Alternative phasing option in brackets)	£1,500 (£1,000)	£3,000 (£2,000)	£5,000 (£3,000)	£7,200 (£6,000)	£9900 (£9,900)
VHF digital links (VDL) per frequency (Alternative phasing option in brackets)	£3,000 (£2,000)	£6,000 (£4,000)	£10,000 (£6,000)	£14,400 (£12,000)	£19,800 (£19,900)

 

The wider policy context

1.18 Ofcom was set up under the Communications Act to secure, among other things, the optimal use of the electromagnetic spectrum. Spectrum use is a relatively small, but important, aspect of society's interest in the efficient, safe and productive working of the aeronautical sector. Government generally, with the support of the CAA, represents the interests of citizens and consumers in ensuring that this sector can operate in ways which serve the UK's economic, environmental, safety and other public policy priorities.

1.19 In recognition of this, in developing our proposals we have worked closely with Government, and the CAA as the regulator with specialist sector expertise, to understand how these other interests are served by the specific transport regulatory frameworks, and to enable them to consider our proposals within the wider public policy contexts of aviation, and let us know their views. We have also shared with them our assessment of the likely impact of our proposals, and the work we commissioned from independent consultants Helios and Plum Consulting, which we are publishing with this document. On the basis of those discussions to date, our assessment of the impacts, and the evidence and analysis provided by our consultants, the Government have indicated to us that they consider our revised proposals have taken into account points made by them in response to our original consultation and form a reasonable basis for further consultation. The Government's final position, and that of the CAA, is of course subject to consideration of any new or additional evidence that stakeholders may provide in responding to this consultation.

Government's role in managing aeronautical VHF communications spectrum

1.20 There will continue to be an important role for Government in influencing change in international agreements relating to the use of aeronautical VHF communications spectrum, and pricing signals faced by Government could help to inform policy making. We recognise that, in principle, there is an option under which aeronautical VHF communications frequencies could be managed by Government which would face the opportunity cost of this spectrum, as we have proposed for spectrum for radar and aeronautical navigation aids . It has been suggested to us that there is merit in this approach, in so far as (subject to Government policy) the costs could be passed on to UK citizens at large (through general taxation) and/or more flexibly apportioned to different parts of the aeronautical sector through a variety of alternative mechanisms, not all of which might be directly related to spectrum usage. We have considered this option, but are minded to conclude that, in the context of aeronautical VHF communications, fees applied directly to end users are likely to be more effective in driving spectrum efficiency changes.

1.21 We have two primary reasons for taking this view. First, unlike spectrum used for radar and aeronautical navigation aids, there is excess demand for spectrum used for aeronautical VHF communications. Decisions by individual users facing AIP fees, to reduce their use of this spectrum, even if only at the margins and often in consequence of other decisions over the medium and longer term, can free up spectrum for others who require spectrum for aeronautical VHF communications. This is not the case with spectrum used for radar and aeronautical navigation aids, where concerted action by the sector and its regulators is needed before spectrum can be released to meet excess demand (in those cases, from alternative users, potentially in other industry sectors). We recognise that in the longer term there may be a case for AIP fees for these frequencies, but the determination of when there might be such a case remains a matter for Government.

1.22 Second, in cases such as aeronautical VHF frequencies, where end users have some scope to review their own longer term use of spectrum within the existing framework of international spectrum management, we believe end users are generally much better informed than regulators or Government and better able to assess and implement options for change. This is not to say that Government should have no continuing role in influencing change but, rather, that the tool of AIP as a longer term pricing signal is more effectively deployed if applied to end users in this instance.

Disruptive impacts in the shorter term

1.23 We recognise that the changes which we are proposing will affect how the aeronautical sector makes its decisions. Indeed, if fees did not cause spectrum users eventually to review current arrangements, there would be little point to applying AIP fees. Changes to the financial landscape, effected in this case by AIP, will generally cause businesses to review decisions in relation to operating practices and, where these practices are unregulated, this may cause the CAA to conclude that it should review the adequacy of existing sector regulation in the light of the changed circumstances.

1.24 We therefore believe it is important that Ofcom should work closely with Government and the CAA to minimise any unproductive disruption during transitional periods. Responding to a changing environment is an inevitable part of the work of all regulatory authorities. As already noted, we are proposing that AIP should be introduced much more slowly than is Ofcom's usual practice even for fee increases of this scale. Our proposals for phasing are intended to allow the CAA and other stakeholders in the sector to respond in a timely fashion to any unforeseen circumstances including outcomes which start to emerge as a consequence of Ofcom's initiative, either using the CAA's existing regulatory framework or by it seeking additional powers. In the unlikely event that CAA is unable to respond in a timely fashion, there would an option for Ofcom to intervene again to modify the level or application of AIP fees. This is consistent with our cautious approach to the introduction of AIP in other sectors.

Safety regulation

1.25 We recognise the critical importance of safety in the aeronautical sector and, in that context, we have given careful consideration to the relevant duties of the CAA as safety regulator and how these align with our AIP proposals. As a general principle, we consider that AIP fees should be set at a level to reflect the underlying value (the opportunity cost) of the spectrum. This view applies even where spectrum-dependent services give rise to wider social costs and benefits which are not fully reflected in the prices which users pay for those services.

1.26 Such wider costs and benefits are often referred to as externalities. Generally, the appropriate policy interventions to maximise such social value, or minimise social disbenefits arising from externalities, take the form of targeted subsidies and taxes and regulations for the outputs concerned (e.g. aid for remote facilities and pollution taxes or permits) rather than subsidising the required inputs (typically labour, land, equipment and, in the case of wireless services, spectrum).

1.27 The possibility that services provided using spectrum may cause externalities or have public good characteristics (such as helping to ensure high standards of aeronautical safety) does not change our view that setting fees to reflect opportunity cost more closely should result in net benefits to UK citizens and consumers. These net benefits are likely to be greatest if AIP is set to reflect opportunity costs and any externalities are, in parallel, addressed directly.

1.28 Accordingly, Ofcom does not consider that AIP fees should be reduced in response any relevant externalities. Instead, Ofcom considers that other responses, including safety regulation where appropriate, will be the more direct (and therefore more efficient) means of ensuring the highest levels of safety in the aeronautical sector are sustained. These issues are discussed in more detail in paragraphs 5.64 to 5.84 below.

1.29 The CAA has confirmed to Ofcom that it has adequate powers to respond to any safety concerns arising from Ofcom's current proposals to apply AIP to the aeronautical sector, and that the adequacy of VHF communications provision will be subject to safety regulation by the CAA using appropriate regulatory instruments taking into account safety justification provided by the service providers, via, for example, safety cases.

1.30 We have set out separately in Section 7 and Annex 7 below, our views on the likely response of spectrum users to the introduction of AIP fees, including the likely response by licensed and unlicensed aerodromes.

Wider economic efficiency

1.31 Our objective in proposing to apply AIP fees to aeronautical VHF communications spectrum is to improve the efficiency with which this scarce resource is used, to the benefit of citizens and consumers. In the short to medium term, the benefits are most likely to be seen in potential reallocations of spectrum, albeit at the margins and potentially focused on some applications, between different users of this spectrum for the same purposes i.e. for communications between ground stations and aircraft. We anticipate that, in response to AIP fees, some spectrum will be transferred to those who value it more highly than the current users. This will have a beneficial impact on the economy as the value of this spectrum is recognised by decision makers. Although there will be an important continuing role for the CAA in managing the use of this spectrum, we do not believe that, acting alone, command and control by the CAA, or any other authority, can achieve an equivalent outcome if users face no incentives to in relation to their use of spectrum.

1.32 Longer term, we envisage that AIP fees will also condition the views of UK spectrum users on wider strategic questions to do with the future international use of this spectrum, including the potential for developing technologies to enable delivery of the same, or better, communications with less spectrum. This may eventually lead to release of spectrum for other uses or reduced pressure for additional spectrum to be allocated for aeronautical communications. These outcomes will have important benefits for the rest of the economy, removing distortions represented by existing fee rates in this sector.

1.33 Ofcom recognises that, currently, it may be difficult for the aeronautical sector to see clear and certain benefits of these longer term objectives in specific areas, compared with the present arrangements which may appear to guarantee low-cost and exclusive access to this resource for an indefinite period. The efficiency of this reliance on regulated access to spectrum is likely, however, to come under increasing pressure as demand for spectrum across both the aviation sector and in the wider economy continues to grow. There are benefits, therefore, in signalling the opportunity cost of this spectrum sooner rather than later, so that new technologies are fully exploited to decrease reliance on historic allocations of spectrum where this is efficient.

The international dimension

1.34 As a signatory to the International Telecommunications Union ("ITU"), the UK has international treaty obligations to ensure non interference with the use of spectrum in the band 117.975 to 137 MHz for aeronautical communications. We fully respect those obligations and nothing in these proposals would be inconsistent with any of the UK's international obligations.

1.35 We are also aware that our proposals are new in the context of the international spectrum management framework, which has not so far involved the use of market mechanisms to allocate scarce spectrum. However we consider that our proposals will not undermine the effectiveness of the international framework.

1.36 We note, however, that the proposals contained in this document are, of course, Ofcom's. For example the CAA has no equivalent statutory duty to consider the efficient use of spectrum in the wider interests of citizens and consumers; its duties relate to the safe and efficient provision of air transport services. As noted above, it will be important that Ofcom continues to work closely with the CAA to ensure that its proposals can be implemented without presenting risks to the CAA's own objectives. At this stage we see no reason, in principle, why a decision by Ofcom to apply AIP fees in the UK should have any adverse impact on the ability of the CAA and its international partners to achieve its objectives within the existing international framework.

Conclusions

1.37 Our revised proposals reflect the extensive responses to our initial consultation, the additional work we have undertaken and commissioned, and a wide range of discussions with Government, the CAA and other sector stakeholders. They seek to reflect the specific circumstances of aeronautical VHF spectrum use. As a result, our proposals for VHF licence fees in this sector have been substantially revised from those set out in our initial consultation in July 2008.

1.38 Our specific fee proposals for VHF spectrum are summarised in the next Section, with more details set out in Section 7, following a description of the background and basis for these proposals in Sections 3-6.