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Executive Summary

1.1 This consultation is concerned with the future pricing of spectrum used for terrestrial television and radio broadcasting. In particular it addresses the issue of whether, how and when the prices paid for spectrum used for terrestrial broadcasting should reflect the opportunity cost of using spectrum for that purpose, with the objective of ensuring, in the long term, that spectrum is used as efficiently as possible.

Spectrum is a valuable and scarce national resource

1.2 The electro-magnetic spectrum is a major asset to the UK, contributing approximately 2-3% 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 our utilities.

1.3 At the same time the amount of spectrum available in the UK is limited. Each use of spectrum creates interference to other users using the same or similar frequencies, in the same or neighbouring areas. Unless use of spectrum is limited, significant interference would likely result, undermining the value of the spectrum to everyone and potentially disrupting services.

1.4 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. Ofcom does not have large amounts of unused spectrum that it can make available for the expansion of existing applications and services, or the introduction of new applications and services (and that which it does have it is making available to the market as quickly as possible commensurate with an orderly process – see the Spectrum Framework Review: Implementation Plan for details). 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

1.5 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

1.6 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.

1.7 Any use of spectrum imposes an opportunity cost on society – the value foregone of alternative use. This is because spectrum is finite and use is exclusionary – the use of spectrum for one purpose precludes its use for another. Therefore all decisions affecting current and future spectrum use should be made with a full and accurate reflection of these opportunity costs, if those decisions are to lead to the socially optimal allocation of resources in the short and long term. If the opportunity costs of spectrum use are ignored or discounted, socially sub-optimal decisions will be made. 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.

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

1.9 It is important to understand in this context that Ofcom’s primary purpose in applying AIP is not, in general, to achieve any specific short-term change in the use of spectrum. Rather, our aim is to ensure that the holders of spectrum fully recognise the costs that their use imposes on society by holding spectrum (or seeking to acquire additional spectrum), when making decisions. We fully appreciate that many holders of spectrum are not in a position to make rapid changes to their use of spectrum in response to the application of AIP, but note that in practically every case the holders of spectrum have opportunities to change their use of spectrum in the longer term, albeit in some cases the longer term may be many years away. The use of AIP is, in our view, justified by the benefits that should materialise in the longer term, as better decisions are made in light of increased awareness and appreciation of the value of spectrum – better decisions that should lead to more efficient use of the spectrum.

1.10 Ofcom also has some evidence of the success of this policy. In the last two years alone, significant amounts of spectrum have been returned to Ofcom for re-assignment, as a more or less direct result of AIP. 28MHz of the more valuable spectrum below 3GHz has been released by public and private sector users in response to AIP, as has 160MHz of the second-tier spectrum in the range 3-10GHz.

1.11 But to reiterate, it is not our aim, when applying AIP, for large amounts of spectrum to be returned to Ofcom in the short term; rather our aim is to ensure that, in the long term and over time, spectrum is being used as efficiently as possible, and is allocated to the most valuable uses, for the benefit of UK citizens and consumers.

AIP and spectrum trading

1.12 In addition to AIP, Ofcom also has a policy of encouraging the growth of secondary markets in spectrum, which we view as a further valuable tool in promoting efficient spectrum use. However, Ofcom views secondary markets as a complement to spectrum pricing rather than a substitute for it, at least for the time being. In the short term at least, the effectiveness of spectrum markets are likely to be limited by, for example, high transaction costs as a result of a lack of experience of the process, and limits to the availability of information.

1.13 The existence of wholesale markets in wireless capacity, such as the one for DTT multiplex capacity, while useful, do not generally create full incentives to use spectrum efficiently. For one thing the wholesale market in DTT multiplex capacity is limited to applications that can be carried on a DTT multiplex, and therefore lacks a mechanism for considering whether alternative uses of the spectrum could be more valuable. Moreover, it is unclear that trade in DTT multiplex capacity has been anything but thin over the past few years. The rate at which capacity has been made available has been lumpy, and it is not clear whether incentives to maximise the value of capacity have been working effectively.

A significant proportion of the most valuable spectrum in the UK is used for terrestrial broadcasting

1.14 The spectrum currently of greatest 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 very 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.

1.15 Terrestrial television and radio broadcasting currently occupies around 400MHz or 40% of spectrum below 1GHz. Terrestrial television broadcasting alone currently occupies 368MHz of spectrum in the band 470-854MHz (UHF Bands IV and V), although the amount of spectrum reserved for DTT in these frequencies is expected to decline to approximately 256MHz by 2012, as a result of digital switchover (DSO). Analogue terrestrial radio currently occupies around 20MHz of spectrum below 1GHz, mainly in the band 87.5MHz-108MHz (VHF Band II). Similarly terrestrial digital radio broadcasting (DAB) currently occupies 12.5MHz in the band 217.5MHz-230MHz (VHF Band III). This is however expected to increase to approximately 19.5MHz following the Regional Radio Conference 2006, allowing gaps in the coverage of local DAB services to be filled in and an additional national DAB multiplex to be offered.

1.16 By contrast, 2G and 3G mobile telephony currently occupies only 70 MHz (7%) of spectrum below 1GHz, and only 350MHz of spectrum below 3GHz.

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

1.17 To date terrestrial broadcasters, or more often than not their transmission service providers, have only had to pay administrative cost-based fees for their use of spectrum, although some commercial broadcasters have in addition paid Broadcasting Act fees 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.

1.18 By contrast (and except where an auction has been used to assign spectrum) almost all other users of the radio spectrum having a specific spectrum assignment have to pay AIP. 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.

The application of AIP to broadcast uses of spectrum was recommended by the 2002 Cave Review – a recommendation endorsed by the Government

1.19 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.”

1.20 At the same time both Prof Cave and the Government recognised the need for the manner and timing of the introduction of AIP on spectrum used for terrestrial broadcasting to take account of a number of factors, including for example the need to ensure that wider public policy is taken into account, and that extant regulatory agreements with broadcasters are respected (noting for example that the licence fees paid by some commercial broadcasters already encompass an implicit payment for access to spectrum).

1.21 In 2004 Ofcom put forward some initial ideas, for consultation, on how AIP might be applied to spectrum used for terrestrial broadcasting, as part of a wide ranging review of spectrum pricing . A number of points were raised in response to this consultation by both broadcasters and others; additional points have also been raised with us subsequently.

A number of objections have been raised to the application of full AIP to broadcasting uses of spectrum

1.22 Some broadcasters have argued that because they are subject to significant constraints on their use of spectrum, and have limited flexibility to respond to incentive pricing, there is limited benefit in applying incentive pricing to broadcast use of spectrum. In addition it is argued, particularly by Public Service Broadcasters (PSBs), that they generate value for society and should therefore be given a discount on the normal level of AIP.

1.23 PSBs (in particular BBC and Channel 4) also argue that applying AIP will reduce the budget that they have available for programming and therefore impact on the delivery of PSB – arguing that it is more efficient to not apply AIP than it is to apply it and then have to provide additional funding for PSB. They argue that charging PSBs AIP, but off-setting the impact on PSB through other sources of funding may achieve the same impact as providing spectrum to PSBs for free, but is inferior because administrative costs are higher and it carries a greater risk of regulatory failure because of the need to calculate the level of funding required to off-set the impact of AIP on PSB.

Ofcom has carefully considered these and other relevant issues and provisionally concluded that, these arguments notwithstanding, AIP should be applied to broadcasting uses of spectrum in the same way as other uses.

1.24 Following our initial consultation in 2004, and in light of responses received, Ofcom decided to commission a report from the consultants Indepen and Aegis, together with Dr Damian Tambini of Oxford University, looking specifically at the issues surrounding the application of AIP to spectrum used for terrestrial broadcasting. The consultants delivered their report to Ofcom in December 2005. Their main conclusions were:

• It is entirely appropriate, from an economic perspective, to apply AIP to broadcast uses of spectrum, notwithstanding the societal benefits that may be generated by broadcasting and the regulations that exist to ensure that broadcasting meets public policy objectives.
• There is no economic merit in discounting the level of AIP applied to broadcasting uses of spectrum, notwithstanding that broadcasting delivers societal value in excess of the private value enjoyed by its providers.
• The current methods of setting AIP (as used to set AIP in other sectors) remain appropriate, and fully reflect the level of output needed to deliver today’s societal value of broadcasting, which is ensured by the wider broadcasting policy framework that Government and Ofcom have put in place.

1.25 Ofcom has carefully reviewed the analysis undertaken by the consultants and concluded, subject to the outcome of this consultation, that it is sound.

1.26 Ofcom has also considered the practicality of applying AIP to the spectrum used for terrestrial broadcasting, and the impact of doing so on various stakeholders. Ofcom has provisionally concluded, subject to the outcome of this consultation, that it is both practical and appropriate to apply AIP to the spectrum used for terrestrial broadcasting, and we therefore propose to do so.

There are numerous opportunities for action in other areas to reflect the charging of AIP for terrestrial broadcast uses of spectrum

1.27 The most significant issue with applying AIP to spectrum used for broadcasting is its potential impact on the financial capacity of broadcasters to deliver PSB and other socially desirable, but perhaps commercially non-viable, broadcasting services. This raises the challenge of how to maintain the desirable level of such services once AIP has been introduced.

1.28 Ofcom was created as the converged regulator for communications in the UK, with duties encompassing both broadcasting and spectrum management, precisely because cross-sectoral issues, such as these, require a more holistic approach than the previous separate regulators could easily adopt. In considering our approach to the application of AIP to spectrum used for terrestrial broadcasting, we are therefore not constrained to think only within the narrow confines of spectrum management, and thereby forced to consider the current arrangements for the securing of broadcasting policy objectives as unchangeable, but rather can take a wider view, considering what might be the best way of simultaneously achieving both spectrum management and broadcasting policy objectives. In considering the introduction of AIP on spectrum used for terrestrial broadcasting, we have therefore not taken the current arrangements for the securing of broadcasting policy objectives as a given, but rather have considered the problem in the round, and sought to identify the best approach to securing optimal use of the electro-magnetic spectrum whilst simultaneously continuing to secure the fulfilment of broadcasting policy objectives.

1.29 Whilst we accept that the challenge of maintaining socially valuable broadcasting after the introduction of AIP exists, we believe that it can be better met through means other than the discounting of AIP – there is plenty of opportunity, between now and when we propose to introduce AIP for other policy reviews to reflect upon the likely impact of our proposals and to make appropriate provision to maintain the desired level of services or make alternative policy choices. Forthcoming policy reviews that will be able to consider and respond to the impact of our proposals include:

• Ofcom’s work on the future of PSB in a digital world
• Ofcom’s next statutory Review of PSB in 2009
• Ofcom’s project on the Future of Radio Licensing
• Future decisions on the establishment of a local television licensing regime
• Ofcom’s financial review of Channel 4
• Future decisions on the TV licence fee
• The Government’s proposed review of public funding for PSB beyond the BBC

1.30 Given the timescales for implementation that we are proposing there would also be opportunity for new primary legislation if necessary, for example to permit new methods of funding of socially desirable broadcasting to be introduced.

Proposed timing of introduction

1.31 In its response to the Independent Review of Radio Spectrum Management, published in 2002, the Government gave certain commitments as to the earliest dates from which broadcasters would have to pay AIP. In the interests of regulatory certainty Ofcom proposes to stand by those commitments. Meanwhile Ofcom has carefully considered the dates from which it would be most appropriate to apply AIP to the spectrum used by each of the different types of terrestrial broadcasting, depending upon the specific facts of the situation in each case.

1.32 Ofcom has reached the following conclusions and is therefore now consulting on the following specific proposals:

No AIP on analogue terrestrial television use of spectrum pre DSO

1.33 Ofcom proposes not to charge the broadcasters (or their transmission service providers) AIP on spectrum used for current analogue terrestrial television broadcasts, prior to the switch off of those services as part of the DSO programme.

1.34 Timely achievement of DSO is key to more efficient use of the spectrum in UHF bands IV and V. Ofcom considers, however, that there are already sufficient incentives on the broadcasters (and their transmission service providers) to meet the DSO timetable, without need for the added incentive of AIP.

1.35 We note in particular that, were the broadcasters who hold Digital Replacement Licences (DRLs) or digital terrestrial television multiplex licences to fail to meet the timetable for Digital Switchover to be set out in those licences, for reasons within their control, Ofcom would be able to fine them up to 5% of annual qualifying revenue or multiplex revenue (as the case may be) for each year of delay. Such fines could amount to many tens of millions of pounds per annum per broadcaster if the DSO programme were materially delayed across the country.

1.36 In light of these incentives, and in view of the relatively short period of time between now and DSO, it does not seem proportionate to establish an AIP regime for the use of spectrum for analogue terrestrial television broadcasting at this time.

1.37 Ofcom does however intend to reserve the right to revisit any decision not to charge AIP on spectrum used for this purpose if the implementation of DSO is materially delayed or postponed indefinitely.

No AIP on digital terrestrial television use of spectrum until 2014

1.38 Ofcom proposes not to charge the operators of digital terrestrial television multiplexes (or their transmission service providers) AIP on spectrum used to broadcast the current digital terrestrial television multiplexes until 2014.

1.39 In its response to the Independent Review of Radio Spectrum Management in 2002 the Government gave a commitment that current digital terrestrial television multiplex operators would not have to pay for their use of spectrum prior to the end of their first licence period (or equivalent in the case of the BBC), which is either 2010 or 2014 depending upon the multiplex. In the interests of consistency Ofcom now considers it best to settle on a single date for the introduction of AIP on spectrum used for the broadcasting of the existing digital terrestrial television multiplexes, and proposes that this be 2014 (being the earliest such date that is consistent with the Government’s commitment).
1.40 The level of AIP to be applied will need to be calculated nearer the time, on the basis of the best information available at that time.

Existing system of population-based spectrum fees for independent national and local analogue radio stations to be extended to the BBC

1.41 In the case of analogue radio, existing spectrum fees (Wireless Telegraphy Act licence fees) already reflect AIP principles to a significant extent for independent broadcasters. They are already based on population coverage, and therefore reflect at least in part the amount and value of spectrum used. Ofcom proposes to extend this existing system of population-based spectrum fees to the BBC. Ofcom also proposes to consider the merits and practicality of enhancing this existing system to reflect differences in the amount of spectrum used to broadcast different analogue radio services. These two proposals alone will, in large part, bring existing spectrum fees for analogue radio broadcasting into line with AIP principles. Since we do not anticipate these changes having a large impact on any broadcaster apart from the BBC, we propose introducing these changes in 2008, following further consultation on detailed proposals during 2007.

No AIP on existing and already planned digital terrestrial radio use of spectrum until 2012

1.42 Ofcom proposes not to charge the operators of current and already planned terrestrial digital radio multiplexes (or their transmission service providers) AIP on the spectrum used to broadcast those multiplexes until 2012. This proposal extends to the eventual acquirers of the additional local and national digital radio multiplexes that Ofcom intends to start advertising later this year (following Ofcom’s decision in December 2005 on the licensing of VHF Band III, Sub-band 3), as well as to the operators of the existing local and national digital radio multiplexes. This proposal mirrors our proposal with regard to the application of AIP to DTT, which is itself based on the Government response to the Cave Review, which committed to not charging AIP on spectrum used for DTT until the end of the initial licence period of the DTT mux operators. In the case of terrestrial digital radio (DAB) the end of the initial licence period for the first national multiplex is in November 2011.

1.43 The level of AIP to be applied will need to be calculated nearer the time, on the basis of the best information available at that time.

AIP to apply immediately to any spectrum acquired for any new terrestrial broadcast service, unless acquired at auction

1.44 Ofcom proposes, however, that AIP should, in principle, apply immediately to any spectrum acquired for the purpose of broadcasting any new terrestrial service, unless such spectrum is acquired through an auction. At this time of intense interest in spectrum, for a wide range of different purposes, it is essential that any new allocation of spectrum to terrestrial broadcasting is made in full recognition of the opportunity costs that such allocation will impose. Applying AIP is one of the best ways of ensuring that this happens.

In the interim, Ofcom intends to update existing cost recovery prices to reflect Ofcom’s costs

1.45 Irrespective of the outcome of this consultation, Ofcom intends to update the cost recovery fees currently charged to certain broadcasting users of spectrum to reflect our current costs. These fees have not been updated since they were set by the RA in 1997. We intend to consult on changes to these fees during 2007.

Other related activities

1.46 In addition to the policy reviews set out above, Ofcom is currently undertaking, or has plans to undertake, work in a number of other related areas including:

• Work to develop proposals for the application of AIP to aeronautical and maritime uses of spectrum – two other major areas of spectrum use to which AIP does not currently apply;
• Consideration of the options by which Recognised Spectrum Access (RSA) might be made available to satellite users of spectrum, with a view to giving receive-only users equivalent rights of protection as terrestrial service users, but also equivalent incentives to make efficient use of the spectrum that such protection requires.

Responding to this consultation

1.47 Stakeholders are invited to submit their written views and comments on the issues raised in this consultation, and on the analysis presented in the associated consultants’ report, by 5pm on Friday 27 October 2006.

The full document is available below:

• Future pricing of spectrum used for terrestrial broadcasting [pdf]
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