SRSP: The revised Framework for Spectrum Pricing

Summary

Executive Summary

1.1 For over a decade, charges for many licences to use radio spectrum have been set by reference to the value of the spectrum as opposed to simply reflecting the cost of managing it. This document concerns the general principles and methodology that we use to set spectrum fees, known generically as 'spectrum pricing', including fees that reflect our costs. It will be of interest to the numerous commercial and public sector organisations throughout the economy that use, or wish to use, radio spectrum to provide a wide range of services.

1.2 The purpose of this document is to explain and to consult on how we propose to set spectrum charges in future. It is intended to clarify certain issues that stakeholders have raised with us, and to reduce uncertainty about the direction of future pricing policy. Some of the principles and practices discussed have evolved over time in relation to specific licence sectors and classes^(-1-). As a result not all of our principles or methodologies have been implemented, in full, for all licence sectors. We propose to 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.

1.3 This document is intended to be a guide to general principles and practice. As such, it does not make detailed fee proposals for individual sectors. We will consult further on fees in specific 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.

1.4 This document is supported by Appendix A (Our current practice for setting AIP fees) which is published as a separate document on our web-site^(-2-) and which provides more detailed information on how we set fees on the basis of AIP currently.

The radio spectrum is a valuable resource and shortages are likely

1.5 The radio spectrum is a valuable resource that is used for a range of commercial and public services. Some frequencies are more valuable than others, for example because they are technically suitable for highly valued services like mobile broadband or broadcasting or because their use is harmonised internationally so equipment is more likely to be readily available and affordable.

1.6 The number of users that can be accommodated in a band is generally limited by the need to avoid harmful interference. Shortages will arise in parts of the radio spectrum and at geographical locations in which demand for spectrum exceeds its capacity. The use of scarce spectrum for one purpose or by one user will generally exclude or limit its use by others and so impose a cost on society in terms of the foregone benefits. In these circumstances, the mechanism by which spectrum is allocated and assigned between different uses and users plays a key role in encouraging its optimal use.

Decisions by users are more likely to secure optimal use

1.7 As the independent regulator for communications, we have a duty to secure optimal use of the radio spectrum^(-3-). 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 broader social benefits, and taking into account the specific consumer and citizen interests, including the interests of particular groups within society, as set out in our statutory duties. We discuss this interpretation further in Section 2.

1.8 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 mechanisms include charging for radio spectrum at a level that provides incentives to promote its optimal use.

The role of pricing

1.9 Most licensed spectrum users pay annual fees. These, historically, were set to reflect spectrum management costs but gave little or no incentive to use scarce spectrum efficiently as the amount paid bore no relationship to the value of the spectrum held.

Administered incentive pricing

1.10 In the face of rising demand and emerging spectrum shortages, the pricing framework was changed in 1998^(-4-) to allow fees to be set above the level needed to recover spectrum management costs with the important requirement that this should only be done with the aims of securing defined objectives. This is referred to as 'administered incentive pricing' (AIP) as fee levels are set administratively by reference to the regulator's estimate of the value of the spectrum rather than directly by the market as in an auction.

1.11 Since Ofcom was set up in 2003, we have continued to set AIP fees, within our framework of duties and objectives and have adopted it as one of our spectrum management tools. We have extended its application and further developed policy on where to apply AIP and how to set fees. AIP based fees are currently paid by the majority of spectrum users, in both the commercial and public sectors, for access to scarce spectrum that has not been auctioned.

1.12 AIP acts as a proxy for market prices for scarce spectrum that has been assigned administratively^(-5-) rather than auctioned. It promotes optimal use by ensuring that users face a signal of opportunity cost^(-6-) imposed on society by their use and therefore take it into account in their business and investment decisions, just as they do for other resources that they employ, and so have incentives to use it efficiently in the provision of downstream services.

Fees other than AIP fees

1.13 Where AIP is not justified, we set fees that reflect our spectrum management costs. We refer to this as 'cost-based pricing'. This applies where spectrum is not scarce or where fees based on the value of the spectrum would be lower than the relevant costs.

1.14 Alternatively, we may set a fee below a level that reflects our costs, including potentially setting no fee. We retain discretion to set low or zero fees in future fee reviews, in light of the circumstances. For example, for licence products known as "non-operational licences", which are available for test & development and academic research, fees are charged at a level specifically to encourage innovation.

1.15 We are not proposing any major review of cost-based fees, but would be interested to hear stakeholders' views on how they think we should set cost-based fees in future fee reviews, and in particular, on any particular factors they think we should take into account.

The effectiveness of AIP

1.16 A policy evaluation we published in 2009^(-7-) reached the conclusion that it was too soon to expect AIP to have had a significant impact but that, in the main, it had met its primary objective of incentivising decisions that were more likely to lead to optimal use of the spectrum. We continue to view spectrum pricing as an important spectrum management tool and expect to continue to apply it where appropriate for the foreseeable future.

The role of AIP as a complement to other regulatory instruments

1.17 We have analysed the implications for pricing policy of the development of the spectrum market since trading was introduced at the end of 2004. In summary, we provisionally conclude that, in general:

• There is no single spectrum market but rather a set of separate markets^(-8-) 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 still remains an important complementary incentive.

1.18 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.

We have reviewed our pricing principles and methodology and propose a number of enhancements

1.19 We have reviewed our general policy and methodology for setting AIP fees, including how we assess congestion, calculate reference rates and set fees for individual licences, and are now consulting on a number of clarifications and propositions on our pricing principles emerging from this work.

• We reaffirm the purpose of AIP is to help secure optimal use of the radio spectrum where spectrum is scarce, considering both frequency and geography, that its effects will usually occur over considerable periods given the long lifetime of much wireless equipment, and that spectrum congestion is a key indicator of whether it should be applied;
  
• We propose that we will continue to take account of feasible alternative uses of the spectrum as well as demand from the existing use in assessing the likelihood of current or future scarcity. This is an established principle that we propose to apply to those licence sectors for which it has not yet been implemented;
  
• We discuss the relevant timeframe over which we propose to take account in AIP of anticipated changes in demand, including from alternative uses that are feasible within that timeframe. We propose a case-by-case assessment of the relevant timeframe;
  
• We remain of the view that AIP fees are generally not an effective tool to take account of wider social benefits or disbenefits associated with activities using spectrum. It is generally more efficient and appropriate for the Government to apply targeted taxes or subsidies or to regulate the activity in question. We will consider the cases of individual uses specifically in any future fee review;
  
• We propose an increased focus on relevant market prices when setting fee reference rates although they will need to be used with caution. In consulting on future fee proposals, we will be explicit about whether and how we intend to use market information;
  
• We propose, where licences are tradable, to take account of the effectiveness of spectrum trading in the relevant spectrum and/or licence sectors, and other relevant factors in considering the role of AIP; and
  
• We propose to base the trade-off between the risks of setting AIP fees too high and the risks of setting them too low compared to the market value on the specific circumstances of the licence class or sector in question. 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.

1.20 We propose to refine the pricing methodology that we currently apply in several sectors. At present, we set fees by reference to one 'fixed service' rate and one 'mobile service' rate, adjusted in certain cases. The main effects of our proposed changes would be:

• to track the variations in the value of spectrum between bands more precisely so that, for example, all current mobile bands^(-9-) would no longer necessarily be priced on the same reference rate basis as each other and nor would all current fixed bands;
  
• in setting AIP fees for individual licences, to reassess each variable in our pricing algorithms to determine whether they are consistent with the principles in this document; and
  
• to continue to assess the impact of our fee proposals and amending them when required. This might affect decisions on timing or phasing and will need to be assessed on a case by case basis.

Future fee rate reviews and next steps

1.21 We are also consulting on how we should determine whether to conduct fee rate reviews in the future. Instead of planning to review all licence sectors periodically in accordance with a pre-arranged programme, we propose to consult on any need for fee reviews as part of our Annual Planning process.

1.22 We may still, however, on occasion need to undertake a fee review where there is a clear and urgent need to do so without including this in the Annual Plan

1.23 In order to promote regulatory stability, we propose the principle that, normally, we would seek stakeholders' views on a proposal to review fees in the next year only if the evidence suggests that this would be justified, taking into account evidence of sufficiently material misalignment between the actual fees and the current value of the spectrum, or the cost of managing it, and other relevant factors.

1.24 We are seeking views from stakeholders on this revised approach, and also their views on whether there is a current need for any reviews of fee, based on our proposed criteria or on other criteria they propose. We specifically ask whether, as some stakeholders have represented to us, we should consider reviewing the fixed links fees as a priority. If as a result of the responses to this consultation we decide that this should be considered, we will include this in our proposed Annual Plan for 2011-12 and consult on its priority against our other spectrum management priorities.

Our key proposed principles and methodologies

1.25 The following table provides a summary of our key proposed principles and methodologies, indicating where in this document we present our rationale for these proposals.

Pricing principles and methodologies	Page Numbers
Proposed 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 value of spectrum which can be indicated by its opportunity cost.	P. 27 - 28
Proposed principle 2: users can only respond in the long term The purpose of AIP is to secure the optimal use of spectrum in the long term, so as to allow users be able to respond to AIP as part of their normal investment cycle. Even where users have constraints imposed on their use of spectrum, in general, some if not all users have some ability to respond to AIP.	P. 28 - 30
Proposed principle 3: when AIP should be applied AIP should apply to spectrum that is expected to be in excess demand from existing and/or feasible alternative use, in future, if cost-based fees were applied. In determining feasible alternative uses, we will consider the relevant timeframe, any national or international regulatory constraints, the existence of equipment standards, and the availability and cost of equipment.	P. 31 - 37
Proposed principle 4: the 'relevant timeframe' for AIP In general, we seek to assess excess demand, congestion and feasible alternative use over a timeframe that reflects the length of existing users' investment cycles.	P. 38 - 39
Proposed principle 5: 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. 40 - 42
Proposed principle 6: AIP and wider policy objectives Socially beneficial uses of spectrum 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. For cost-based fees there might be some circumstances in which it could be appropriate to provide a concession.	P. 42 - 44
Proposed principle 7: AIP concessions and the promotion of innovation It will generally not be appropriate to provide AIP concessions in order to promote innovation. We may consider whether cost-based fees should be set at a lower level in order to promote innovation.	P. 44 - 45
Proposed principle 8: use of market valuations We will take account of observed market valuations from auctions and trading alongside other evidence where available. However, such market valuations will be interpreted with care and not applied mechanically to set AIP fees.	P.45 - 47
Proposed principle 9: setting AIP fees to take account of uncertainty Where there is uncertainty in our valuations and the likelihood of demand for feasible 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.47 - 51
Proposed 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. 54 - 55
Proposed methodology 2: reference rates Reference rates will be based on the estimated value of the spectrum in 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 spectrum value.	P. 55 - 57
Proposed methodology 3: calculating individual licence fees In converting reference rates to fees, we will take account of the value of 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. 57 - 59
Proposed 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.61 - 63

Other pricing related activities

1.26 We are currently undertaking a number of specific fee rate reviews and some stakeholders have asked us to clarify how this consultation relates to this separate series of consultations, particularly those for use of spectrum by the aeronautical and maritime sectors, but also other work we are undertaking in which fees are a core or key element.

1.27 This consultation proposes a framework for spectrum pricing that, subject to consultation, we expect to apply to all future fee rate reviews. It does not, however, apply this framework to any specific licence sector, nor propose any specific changes to fee rates. However, in developing the proposals for this framework we worked closely with the teams responsible for the specific aeronautical, maritime and PMSE proposals and therefore anticipate no inconsistency in the overall principles and methodologies incorporated in any of the proposals in the ongoing specific fee reviews.

1.28 Stakeholders should also note that the Government has recently laid a draft direction in Parliament which, if made, would require us to revise the level of annual licence fees applying to existing 900MHz and 1800MHz mobile licences to reflect the full market value of the frequencies in those bands. If the direction is made we would expect to consult, in due course, on our proposed approach to the implementation of this element of the direction.

1.29 We have also previously concluded that we will consult nearer the time on any fees that we propose for digital terrestrial broadcasting and will not implement these before the end of 2014, and that Ships' and Amateurs' licences will be free ^(-10-). We do not intend this consultation to reopen either of these decisions.

Footnotes:

  1.- The term "licence sector" is used generically and may include a single licence class or a number of licence classes used by a group of users.

  2.- http://www.ofcom.org.uk/consult/condocs/srsp/appendixA.pdf

  3.- See section 3(2)(a) of the Communications Act 2003, which requires Ofcom to secure (among other things) in the carrying out of its functions, the "optimal use for wireless telegraphy of the electro-magnetic spectrum".

  4.- The Wireless Telegraphy Act 1998 - since then replaced by the Wireless Telegraphy Act 2006.

  5.- That is assigned on a 'first come first served' basis, by comparative selection ('beauty contest') or reserved for the provision of public services.

  6.- Opportunity cost is the value of alternative spectrum use forgone by society due to the current spectrum use.

  7.- http://www.ofcom.org.uk/research/radiocomms/reports/policy_report/evaluation_report_AIP.pdf

  8.- For ease of reference we have used the term market as convenient shorthand and this is not intended to refer to a relevant economic market.

  9.- That is, those whose AIP fees are set by reference to the mobile rate. This currently applies to, for example, Business Radio and Public Mobile Radio (cellular telephony) licences.

  10.- When applied for online.

The full document is available below