SRSP: The revised Framework for Spectrum Pricing

Statement published 17|12|10

Executive Summary

1.1 The purpose of this document is to set out our conclusions on our revised Framework for spectrum pricing. This Framework will be used in future as a guide to setting AIP fees (based on the opportunity cost of the spectrum used) and will inform how we develop AIP fee proposals in future, as well as to how we will determine when a fee review is appropriate and how we will undertake post-review evaluations. We undertook this review because some of the principles and practices discussed in our consultation document have evolved over time in relation to specific licence sectors and classes. As a result not all of our principles or methodologies have been implemented, in full, for all licence sectors. We have now concluded that we will continue to apply these refinements systematically in future and in a way that takes full account of the specific characteristics and circumstances of each sector.

1.2 We will apply this Framework recognising that we need to take account of the particular circumstances of the frequency bands and licence types under review. It is likely therefore that in any specific fee review that some principles and methodologies will have more bearing on our proposals than others, and that in some circumstances we may need to diverge, for specific reasons, from these principles and methodologies. In general where we propose to do this we will set out our reasoning and consult.

1.3 This document presents high level AIP principles and methodologies and as such, it does not make specific fee proposals for individual licence sectors. We will consult further on fees for specific licence sectors as and when we consider it necessary to review these. When we do so, we will in all cases explain the various factors that we have taken into account in our proposals and, following consultation, the reasons for our decisions.

Decisions by users are more likely to secure optimal use

1.4 As the independent regulator for communications, we have a duty to secure optimal use of the radio spectrum . We interpret 'optimal use' to mean that the spectrum is used in a way that maximises the value that citizens and consumers derive from it, including the wider social value of spectrum use, and taking into account the specific consumer and citizen interests, including the interests of particular groups within society.

1.5 We believe that objective is, as a general rule, more likely to be achieved if detailed decisions on how spectrum is used are left to those directly engaged in its use rather than dictated centrally by a regulator. We have therefore adopted a range of complementary regulatory instruments to manage the spectrum with less central direction by Ofcom while recognising that regulation continues to play an important role in managing interference, negotiating international agreements to enable the better exploitation of the use of spectrum for the UK, securing compliance with international obligations and addressing market failures. These regulatory instruments include AIP fees set at levels that provide incentives for its optimal use.

The role of AIP as a complement to other regulatory instruments

1.6 In our consultation document we presented our analysis of the implications for pricing policy of the development of the spectrum market since trading was introduced at the end of 2004. In summary, we conclude that, in general:

• There is no single spectrum market but rather a set of separate markets across the various frequency bands;
• Spectrum markets remain immature, with limited liquidity and an absence of developed market institutions and price information that would make them more effective;
• Trading and liberalisation alone may not be sufficient to promote efficient use in certain spectrum markets and so AIP may have a more important role in such markets;
• In markets where trading and liberalisation have a stronger role to play in the promotion of the efficient use of spectrum, the role of AIP may be less critical, but it can still provide an important complementary incentive.

1.7 We conclude that AIP is a valuable complement to spectrum auctions, trading and liberalisation and can usefully reinforce incentives from trading. However, this general conclusion will need to be assessed on a licence sector-specific basis in future fee reviews.

Our key AIP principles and methodologies

1.8 We have concluded on a set of eight principles and a methodology consisting of four methods that will be used to determine whether AIP should be applied and at what level the AIP fee should be set for any specific fee review of a licence sector in future. Having reviewed the comments from respondents to the consultation we have concluded that proposed principle 2 of the consultation document is not required going forward as while it sought to address an issue that has been of concern to stakeholders that users of spectrum typically need time to respond to pricing signals - it does not add to the principles of when and how we approach a fee review. The way in which we take into account the fact that users cannot respond efficiently in the short term is through the methods by which we calculate opportunity cost (captured in methodology 2) and through our consideration of the impact of changes to fee levels in our impact assessment (captured in methodology 4). We discuss this in more detail under principle 2, in Section 4, at pages 35 40.

1.9 Having considered the comments we received at a series of stakeholder workshops, as well as the formal written responses, we have recognised that in the past, including in our consultation document, we have used the terms "spectrum value" and "opportunity cost" somewhat interchangeably. We have done this without necessarily always explaining what we mean by "value" as there are a number of ways in which this term can be interpreted. When discussing setting AIP fees to reflect the value of spectrum we have usually meant that these fees would be set at the price that would emerge in a well-functioning market. In a well-functioning market, the price of spectrum would be equal to the value of that spectrum in the next highest value use, rather than the value that the current user (for example, a company) might place on the spectrum. Given the possibility of continuing confusion about our meaning of the term "value" in the context of AIP fees we have redrafted our AIP principles and methodologies to clarify that we set AIP fees on the basis of opportunity cost.

1.10 We have, as a result, renumbered the AIP principles in the Table below and in the final spectrum pricing Framework. In the remaining document, however, for consistency with our consultation document and therefore ease of cross-reference, we have referred to the proposed principles by the number indicated in the consultation document.

1.11 The following two tables provide the text we have concluded on for these AIP principles and methodology. It also provides details of where in this Statement we provide our response to issues raised by respondents to the consultation and our rationale for concluding on these principles and methodologies.

AIP pricing principles	Page Numbers
AIP principle 1 : role of AIP AIP should continue to be used in combination with other spectrum management tools, in both the commercial and the public sectors, with the objective of securing optimal use of the radio spectrum in the long term. AIP's role in securing optimal use is in providing long-term signals of the opportunity cost of spectrum.	P. 25-36
AIP principle 2: when AIP should be applied AIP should apply to spectrum that is expected to be in excess demand from existing and/or feasible alternative uses, in future, if cost-based fees were applied. In determining feasible alternative uses, we will consider over the relevant timeframe, any national or international regulatory constraints, the existence of equipment standards, and the availability and cost of equipment as well as other factors that may be appropriate.	P. 42 - 48
AIP principle 3: the 'relevant timeframe' to assess future demand of spectrum In general, we need to determine the time period over which we will seek to assess excess demand, congestion and feasible alternative use. We will do so over a timeframe that reflects the typical economic lifetime of existing users' radio equipment.	P. 48 - 53
AIP principle 4: AIP and spectrum trading Many secondary markets are unlikely to be sufficiently effective to promote the optimal use of the spectrum without the additional signal from AIP. Therefore AIP will likely continue to be needed to play a role complementary to spectrum trading for most licence sectors.	P. 53 - 57
AIP principle 5: role of AIP in securing wider social value Uses of spectrum that deliver wider social value do not, as a general rule, justify AIP fee concessions, because direct subsidies and/or regulatory tools other than AIP are normally more likely to be efficient and effective.	P. 57 - 61
AIP principle 6: AIP concessions and the promotion of innovation It will generally not be appropriate to provide AIP concessions in order to promote innovation.	P. 62 - 64
AIP principle 7: use of market valuations We will take account of observed market valuations from auctions and trading alongside other evidence where available when setting reference rates and AIP fee levels. However, such market valuations will be interpreted with care and not applied mechanically to set reference rates and AIP fees.	P. 64 - 71
AIP principle 8: setting AIP fees to take account of uncertainty Where there is uncertainty in our estimate of opportunity cost, for example arising from uncertainty in the likelihood of demand for feasible alternative uses appearing, we will consider the risks from setting fees too high, or too low, in light of the specific circumstances. When spectrum is tradable we will consider the extent to which trading is expected to promote optimal use, and will also have particular regard to the risk of undermining the development of secondary markets.	P. 71 76

AIP methodologies	Page Numbers
AIP methodology 1: AIP and congestion In setting AIP fees, we will assess current and future congestion in existing use and demand for feasible alternative uses in the frequency band in question and at different geographic locations over the relevant timeframe, given technological, regulatory and international constraints and using readily available evidence.	P. 82 - 86
AIP methodology 2: reference rates Reference rates will be based on the estimated opportunity cost of spectrum use, considering both the current use and any feasible alternative uses. These estimates will be informed, where appropriate, by the available market information (if any), and economic studies of the value of spectrum in different uses.	P. 86 - 95
AIP methodology 3: calculating individual licence fees In converting reference rates to fees, we will take account of the opportunity cost and the amount of spectrum denied to others. This will generally be based on frequency, geographical location, bandwidth, geographical coverage or other measure that reflects the geographical extent of co-ordination requirements and in some cases the exclusivity of an assignment.	P. 95 - 98
AIP methodology 4: impact assessments We will undertake Impact Assessments on our fee proposals to identify any potential detrimental impacts to spectrum users, consumers and citizens. We will need to consider carefully the balance of benefits and risks of the implementation of all changes in fees.	P. 98 - 103

1.12 In addition to the AIP principles and methods we have also concluded on a set of four principles to address how and when we will review AIP and cost-based fees and how we will evaluate the success of these fees in future. We have called these our four pricing review principles. These are summarised in the following Table where we also indicate where our response to issues raised by stakeholders on these issues are located in this Statement, along with our conclusions.

Pricing review principles	Page Numbers
Pricing review principle 1: when to review fees If we think there is a case for a fee review we will generally seek views on the need for a review from stakeholders when we consult on Ofcom's Annual Plan. We may still, however, on occasion undertake a fee review where there is a clear need without including this in the Annual Plan. We will propose to conduct a fee review only where the evidence suggests that a review would be justified, including evidence of a likely and sufficiently material misalignment between the current rates and the opportunity cost of the spectrum for fees based on AIP, or between the current rates and our spectrum management costs for cost-based fees. When we conclude on a review in future, we would also specify, where appropriate, a time period during which we would not normally expect to carry out a further review.	P. 104 - 109
Pricing review principle 2: Process for carrying out fee reviews Step 1 - Is there evidence to indicate that fees are out of line with opportunity cost or our costs of spectrum management? In order to decide whether or not a particular licence fee needs to be reviewed at a particular time, we will first look for evidence of a sufficiently material misalignment of the fee and the relevant opportunity or spectrum management cost. This is because severe misalignment may indicate that fees at the present level are unlikely to be achieving our objectives of promoting optimal use of spectrum or reflecting our spectrum management cost; Step 2 - Is there evidence that a fee change would increase the efficiency of use more effectively than another spectrum management response? As noted before, spectrum pricing is only one of a range of regulatory approaches available to us. There may be other steps we could take such as identifying more spectrum that could be made available for the current use, initiating a planned programme to clear the band for an alternative use, or reviewing the regulations around the spectrum such as international or domestic technical constraints; Step 3 - Is this the right time to review? We will also be responsive to evidence of an urgent need to change a fee, for example that the existing fee level is causing serious detriment, such as a majority of users unexpectedly vacating a band without realistic prospect of new users taking up the available spectrum - or that a very valuable band is, or is likely to become, severely congested without a change in fee level.	P. 109 - 113
Pricing review principle 3: Post-review evaluations We will attempt to evaluate the effectiveness of fee rates based on AIP. We will do this by collecting and assessing evidence that: users (individually or collectively) are changing their spectrum requirements, or congestion and demand in a band or location is worsening, or spectrum is not used, or used only to a small extent, for a considerable time.	P. 113 - 118

Future Fee reviews

1.13 We have concluded that we intend to undertake a review of the frequency bands used in UK for fixed links, subject to the availability of resources and consideration of our overall priorities for spectrum management, following the publication of this Statement. This review will encompass all services that share spectrum with fixed links to reflect our intention to price spectrum through consideration of feasible alternative uses, rather than licence sectors. We note that as part of this review it may be necessary to review the costs of managing this spectrum as this will inform the minimum fee or "floor" for such AIP-based fees.

1.14 We have also concluded that a wholesale review of our approach to cost-based fees is not a priority for stakeholders or Ofcom at this time, given the resource constraints that we face and our view of the priority for a review of fixed link fees. We may however review individual cost-based fees where we believe this should be a priority against our other spectrum management activities.