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In April 2003 the Radiocommunications Agency (RA) commissioned a study from the consultants Indepen and Aegis, together with Warwick Business School, to undertake a review of the application of Administered Incentive Pricing (AIP) to radio spectrum, as part of the programme of work to implement the Government’s response to the Cave Review of Radio Spectrum Management. Indepen et al were asked to:

• Advise whether the existing methodology for calculating AIP generates optimal incentives for licensees to use spectrum efficiently (from an economic perspective), and if not, to develop a new methodology that is economically robust and can be implemented in practice
• Illustrate the application of the proposed methodology to a number of different spectrum bands
• Propose an alternative approach to setting AIP in bands where the recommended methodology is impractical
• Develop principles that could be used to identify those areas of the spectrum that are not suitable for the application of AIP and recommend a pricing approach in these cases
• Advise on whether and under what circumstances AIP should be charged to licensees with tradable licences

The Indepen/Aegis/Warwick Business School study has now been completed and their final report is available here.

It should be noted that the estimates of the marginal opportunity cost of spectrum produced by the consultants, as illustrations of the application of their methodology, have been based on publicly available information alone, and are therefore of variable quality. In practice it has proved impossible for the consultants to produce such estimates for some classes of licence - e.g. Radio Broadcasting - because of the difficulties in obtaining suitable data from public sources. Further work will therefore be required to fill these gaps and refine these values.

It should also be recognised that the consultants were not asked to determine final spectrum licence charges - that is for Ofcom to do, following consultation, and Ofcom will take a range of other policy issues and objectives into account, beyond simply that of maximising efficiency in the use of spectrum, when setting final spectrum licence charges.

Next steps

Ofcom will now further develop its thinking on the appropriate basis and level for future spectrum licence charges, taking the Indepen/Aegis/Warwick Business School work as an input, but also taking into account other policy issues and objectives. Broader policy issues that will need to be considered in the context of this review include:

• Promotion of digital switchover
• The relationship to the Public Service Television and Digital Radio Reviews
• Promotion of competition in the provision of electronic communication services
• The introduction of spectrum trading
• Promotion of Broadband Britain

For some licence classes - e.g. those associated with broadcasting - it will also be necessary to recognise that some licensees are to some extent already paying for their use of spectrum through other licence fees, such as those levied under the Broadcasting Act. It will therefore be necessary to ensure that Broadcasting Act licence fees take account of spectrum pricing if incentive pricing is introduced for these licence classes.

Ofcom expects to publish the conclusions of its work on the appropriate basis and level for future spectrum licence charges, in the form of a consultation paper, around the end of the summer. This will include an assessment of the magnitude of the impact that any proposed changes are likely to have on various classes of licensee.

Following careful consideration of the responses to that consultation paper, Ofcom expects to publish draft licence charges regulations towards the end of the calendar year, with final regulations coming into effect from April 2005 for most licence classes.

Administered incentive pricing will not be introduced for some uses of spectrum until after April 2005 - for example the Government has given a commitment that incentive pricing will not be introduced for analogue TV broadcasting spectrum before 2006. Further work will also be needed to assess the scope for applying incentive pricing to sound broadcasting spectrum and the possible timing of this.

Whilst Ofcom is not formally consulting on the consultants work, we would welcome comments; these may be emailed to: spectrumpricing@ofcom.org.uk

• An economic study to review spectrum pricing [pdf]

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