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Future pricing of spectrum used for terrestrial broadcasting

Executive Summary

1.1 This Statement follows Ofcom’s consultation on the future pricing of spectrum used for terrestrial broadcasting. It sets out our intentions in respect of:

implementing charging for spectrum used for digital terrestrial broadcasting of television and radio; and
extending the current charging regime for analogue commercial sound broadcasting to the spectrum used by the BBC for its radio services.

Ofcom’s decision

1.2 In July 2006, we consulted on proposals to implement administered incentive pricing (AIP) for spectrum used for terrestrial broadcasting. We did so on the principle that one of the best ways of ensuring that the opportunity costs of spectrum are fully and accurately reflected by decision-makers is for those opportunity costs to be reflected in prices that have to be paid to hold spectrum.

1.3 The consultation produced a number of responses, which this Statement outlines and which we have considered fully. Our overall conclusions are that:

it is right that broadcasting use of spectrum should be subject to appropriate charges in future, in the same way as almost all other uses are or will be;
the right time to introduce charging for spectrum used for digital broadcasting – both television and radio – is the end of 2014;
the right time to extend the existing charging regime for commercial analogue radio spectrum to that used by the BBC is 2008;
before introducing any charges, we will consider carefully any potential effects on broadcasting output, and the right options to address or mitigate them.

Spectrum is a valuable and scarce national resource

1.4 The electro-magnetic spectrum is a major asset to the UK, contributing approximately 3% to UK GDP and underlying many aspects of our lives. Spectrum is the means by which all wireless communications devices communicate and is therefore critical to areas such as air travel, emergency services, cellular telephony, mobile multimedia and data, radio and television broadcasting, defence and utilities.

1.5 At the same time, the amount of spectrum available in the UK is limited. As a result of significant growth in demand for wireless applications and services over the last decade or more, most of the useful spectrum in the UK is now in use. It is therefore increasingly important that all users of spectrum are encouraged to make the most efficient use possible of the spectrum they hold, or to release that spectrum to others who can make better use of it.

Ofcom is tasked with ensuring that optimal use is made of spectrum, for the benefit of UK citizens and consumers

1.6 Ofcom is responsible for management of the spectrum for wireless communications in the UK, for all non-Crown users. Ofcom’s key statutory duty in this regard is “to secure the optimal use for wireless telegraphy of the electro-magnetic spectrum” for the benefit of citizens and consumers.

Spectrum pricing is one tool that Ofcom can use to encourage efficient spectrum use

1.7 Charging annual fees for the holding of spectrum (Wireless Telegraphy Act licence fees) is one way in which Ofcom can encourage current and prospective holders to make the right decisions to ensure efficient use of the spectrum. Spectrum use is exclusionary: use of spectrum for one purpose precludes its use for another. Decisions affecting current and future spectrum use should therefore be made with a full and accurate reflection of the opportunity cost that such use imposes, if those decisions are to lead to the socially optimal allocation of resources in the longer term.

1.8 One of the best ways of ensuring that these opportunity costs are fully and accurately reflected by decision-makers is for them to be reflected in prices that have to be paid to hold spectrum.

1.9 This is the principle behind Ofcom’s use of what is known as Administered Incentive Pricing, or AIP – the charging of annual fees for holding spectrum that reflect the opportunity cost of holding that spectrum.

Terrestrial broadcasting is almost unique among major spectrum users in not currently having to pay AIP

1.10 The spectrum currently of most value to the UK economy and society is that below 1GHz. These frequencies combine characteristics of coverage (propagation) and capacity (bandwidth) which make them suitable for a wide range of different applications, including defence, broadcasting, private and public mobile communications, aeronautical and maritime communications and navigation. Terrestrial broadcasting is currently the largest single user of this spectrum.

1.11 Terrestrial television and radio broadcasting currently occupies around 400MHz or 40% of spectrum below 1GHz. By contrast, 2G and 3G mobile telephony currently occupies only 70 MHz (7%) of spectrum below 1GHz and only 350MHz of spectrum below 3GHz.

1.12 To date terrestrial broadcasters, or more often than not their transmission service providers, have paid only administrative cost-based fees explicitly for their use of spectrum. In addition, some commercial broadcasters have paid certain Broadcasting Act fees (“Additional Payments”) that include an implicit charge for the use of spectrum, based on the value of that spectrum to the broadcaster in its current analogue use, as well as other elements that reflect the overall package of rights and obligations in their Broadcasting Act licences.^(-1-)

1.13 By contrast, most other users of the radio spectrum who hold a specific spectrum assignment have to pay for its use, either through AIP or through having acquired the spectrum at auction. AIP, or its equivalent, is not only paid by most commercial users of spectrum, but also by many government and public agencies, including for example the police, fire and ambulance services, and the MoD. Broadcasting is one of the few remaining areas of spectrum use where AIP has not yet been applied.

Figure 1. Terrestrial broadcasting is the largest user of spectrum below 1GHz that does not as yet pay AIP

AIP for spectrum used for broadcasting has been widely recommended for some years

1.14 In his Independent Review of Radio Spectrum Management, published in 2002, Professor Martin Cave recommended that AIP be applied to the spectrum used for terrestrial broadcasting in the same way as it is applied to most other services. In its response, published in the same year, the Government endorsed this recommendation:

"The Government agrees that spectrum pricing is a tool which should be applied to all broadcasters to promote the most efficient use of the spectrum.”

Ofcom’s 2006 consultation

1.15 In our consultation document^(-2-) we made a number of proposals:

no AIP on analogue terrestrial television use of spectrum pre-digital switchover (DSO) – subject to Ofcom reserving the right to revisit this decision if the implementation of DSO is materially delayed or postponed indefinitely;
no AIP on digital terrestrial television use of spectrum until 2014;
existing system of population-based spectrum fees for independent national and local analogue radio stations to be extended to the BBC;
no AIP on existing and already planned digital terrestrial radio use of spectrum until 2012;
AIP to apply immediately to any spectrum acquired for any new terrestrial broadcasting service, unless acquired at auction.

Responses to the consultation, and other representations

1.16 Ofcom received 18 responses to its consultation. Of these, three were broadly and strongly supportive of the proposal that AIP should be applied to broadcasting uses of spectrum in the same way as other uses.

1.17 In the responses objecting to our proposals, there was both opposition in principle, and concern about specific implementation aspects. The objections in principle covered three main themes:

that AIP was not needed to incentivise efficient use of spectrum;
that multiplex operators, or broadcasters, would not be able to respond to a pricing signal because of specific terms in their licences, set by Ofcom and/or Government;
that the effects on broadcasting output of charging broadcasters and multiplex operators for spectrum would be undesirable for citizens and/or consumers.

1.18 Ofcom has considered these points, and concluded that:

there are considerable incentive benefits from introducing price signals associated with spectrum use, that apply to broadcasting use as much as to any other use;
spectrum users – and Ofcom, and Government – can respond, albeit over the longer term, to the incentives created by AIP. AIP has the potential not only to incentivise more efficient behaviour by spectrum users, but more efficient decision-making by regulators too;
a range of ways exists to mitigate any detrimental effects on consumers or citizens. There is considerable time available for spectrum users and others to identify potential effects and consider a response.

1.19 As a result, Ofcom has decided to proceed along the lines of its original approach, that is, a pre-announced programme of introducing AIP for broadcasting uses of spectrum, in the same way as other uses. At the same time, we recognise that there could be potential effects on broadcasting output that could justify changes either to the regulatory or funding structures. We are therefore making clear that in light of our specific interests in, and duties in relation to, broadcasting, we are ready to discuss whether any such changes are appropriate, while noting that certain changes including decisions on public funding are not in our gift, but a matter for the Government and Parliament.

1.20 There were concerns expressed over implementation, or over specific details:

a range of alternative proposals on timing, in relation to both DTT and DAB;
concern about the potential disparity between two proposed approaches to deriving spectrum charges for local DAB multiplexes;
specific objections to the treatment of Community Radio and RSL radio, particularly in comparison with small analogue commercial radio stations.

1.21 On timing, on further review Ofcom has decided:

to confirm its proposal to implement AIP for spectrum used for digital television broadcasting from the end of 2014;
to amend its proposal for the timing of AIP on digital terrestrial radio spectrum, so that this will now be introduced from the end of 2014.

1.22 On the apportionment of fees for local DAB, we have noted the concerns expressed and will take them into account in drawing up the proposals on which we will consult before introducing charging to spectrum used for DAB services, nearer the time.

1.23 Ofcom’s approach to both Community Radio and RSL Radio has been separately consulted on previously, and has been confirmed. We do not propose to revisit this in response to comments received in this consultation.

1.24 There was also a general concern among respondents that the level of AIP for any of this spectrum is not yet known. Ofcom recognises that in any business, certainty about future costs is preferable to uncertainty. However, it is not currently possible to forecast spectrum demand in 2014 sufficiently well to predict the prices that would reflect the opportunity costs. The only certainty we would have in doing so would be that any such prediction would be wrong.

1.25 Ofcom will undertake to conduct a transparent process to derive the opportunity cost of spectrum used for DTT and DAB broadcasting. We will ensure that all stakeholders, in particular the licensees, have the opportunity to make representations before we set the administered prices.

1.26 We have also taken into account points made in other representations, including day-to-day correspondence and meetings with stakeholders, and points made in response to other consultations such as the Digital Dividend Review.

Working with broadcasting users of spectrum

1.27 We recognise that AIP for spectrum use is a substantive change for most broadcasters and multiplex operators. Some broadcasters – such as commercial radio analogue broadcasters – already operate under a charging regime and so have assimilated these costs, and are used to including these in their decision-making.

1.28 But the BBC’s radio arm, and the DTT and DAB multiplex operators, have hitherto had free spectrum, assigned in fixed quantities by government, the Radio Authority, or the ITC. The opportunity costs of their marginal use of spectrum, or other options for delivering content, have not automatically figured in their decisions. The introduction of AIP, on whatever terms, is a material change to their operating environment.

1.29 It is worth noting, in relation to this change:

the expected charges under a system of AIP are not expected to be large in comparison with other costs – and we will consult further before confirming these;
we are building in a significant time for multiplex operators to consider the potential effects of charging, and to discuss these with us or with government;
we are ready, at all times, to work with broadcasters and/or multiplex operators, to consider whether, and how, the broadcasting regulatory or funding regimes should be changed in response to spectrum charging.

1.30 If it seems likely that there could be material detriment to citizens or consumers from the effects of AIP on broadcasting output, there are a number of ways available to Ofcom, government and spectrum users to address this. For example, changes to regulation could be made, or additional public support made available, to ensure that the required output was safeguarded if this was thought necessary. Finally, as we made clear in the consultation document, these means could include potentially not introducing AIP, or levying it at a reduced rate, if this was necessary to ensure public service broadcasting requirements could be met.

1.31 It also is important to note that Ofcom’s aim in setting AIP charges is simply to ensure that spectrum users face the full opportunity cost of the spectrum they are using. In any case where a licensee is already fully exposed to this cost by different means, for example by having paid market value for the spectrum, or where there is an effective secondary market in the spectrum, or a regime of Broadcasting Act fees^(-3-) has already been put in place that effectively means the licensee faces the full opportunity cost of spectrum, then there is no need for an additional AIP charge. However, if the licensee is not facing this cost, then an AIP charge is justified.

Next steps

1.32 We will publish a consultation document on the detailed implementation of spectrum pricing for spectrum used by the BBC’s analogue radio services, and commercial analogue radio services, later this year.

1.33 Work on setting prices for spectrum used for digital broadcasting will commence nearer the time of implementation. Following that work, spectrum users will be notified of our charging principles, the prices that will apply, and detailed arrangements for issuing charge notices and handling payment.

Footnotes:

1.- For further discussion of Additional Payments, please see Section 3 of the full document.

2.- Future pricing of spectrum used for terrestrial broadcasting, July 2006

3.- Under the Broadcasting Act 1996, both Ofcom and the Secretary of State have powers to set Additional Payments, in the form of a Percentage of Multiplex Revenue, for both DTTand DAB licences. These potential charges for Broadcasting Act licences are discussed in Section 3.

The full document is available below:

Future pricing of spectrum used for terrestrial broadcasting [pdf]
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