A consultative document on spectrum trading, October 1998, published by the Radiocommunications Agency of the Department of Trade and Industry

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1 Introduction and executive summary

1.1 The radio spectrum supports some of the most dynamic and successful industries in the UK economy. Together, their use of radio contributes over £13bn to UK GDP, generates £12-15bn competitiveness and consumer benefits and supports over 400,000 jobs 1. These figures are growing rapidly. The effective management of the finite radio spectrum resource is crucial if full benefits are to be derived from the use of radio and the UK is to maintain its position at the leading edge of the Information Age.

1.2 The Radiocommunications Agency, which is responsible for managing most non-military radio spectrum in the UK and representing the UK in international discussions on radio use, is keen to promote the economically efficient distribution of spectrum through market mechanisms within a framework of effective spectrum management. The Agency is currently in the process of implementing spectrum pricing and now wishes to explore the opportunities offered by spectrum trading. To that end, it is seeking views on:

developing spectrum trading, within a suitable framework of spectrum management, as a further market mechanism to facilitate the distribution of spectrum to those who can use it best; and

reducing the administrative burden on businesses and other radio users by making it easier to transfer licences to use radio equipment.

1.3 The Agency would continue to be involved in actively managing the radio spectrum; and spectrum trading would complement, not totally replace, existing management methods.

1.4 Spectrum trading could not be introduced without legislation to amend the Wireless Telegraphy Act 1949 and, in the case of some forms of trading, modifications to the EU Licensing Directive 2. The proposals in this document are conditional on changes to UK and European legislation, the timing of which cannot be foreseen with certainty at this stage.

1.5 As described in the Green Paper Regulating communications: approaching convergence in the Information Age (Cm 4022) 3, the introduction of digital technology is bringing about the convergence of hitherto separate services, such as telecommunications and broadcasting. The Government is committed to keeping the regulatory framework up to date to meet the challenges of the Information Age. This includes continuing to develop new tools to enhance the effectiveness of spectrum management.

1.6 The Wireless Telegraphy Act 1998 introduced spectrum pricing and selective grants to promote spectrum efficiency as aids to effective spectrum management. These measures will provide incentives to use spectrum more efficiently and invest in more spectrum-efficient technology so that headroom is created for innovation and growth. The new regime is in the process of being phased in over a period of years.

1.7 The Government made clear during the passage of the Act that spectrum pricing could be a stepping stone to further reform; and that it saw considerable attractions in the introduction of trading of spectrum licences at an appropriate time and within a suitable statutory framework.

1.8 Spectrum trading would allow licences for the installation or use of radio equipment to be bought and sold through the market instead of being available only from the Radiocommunications Agency 4. This document seeks views on the possible future introduction of spectrum trading.

1.9 As explained in more detail below, there are various forms of spectrum trading. These range from the transferability of single assignments with no change of use of the spectrum to more complex variations in which assignments may be sub-divided or combined and, where appropriate, used to provide a different radio service.

1.10 Transferability of assignments would offer users potential advantages described in more detail below. A key question is how far to move towards more complex forms of trading. These would open up the possibility of users having greater flexibility and choice in the way in which they use the radio spectrum but would also have implications for the extent to which spectrum use is strategically planned and managed by the Agency and may not be suitable for several licence classes.

1.11 The questions on which views are sought are listed for convenience at Annex C, which may, if you wish, be used as a pro forma for your response.

1.12 Please send comments on spectrum trading in general or the specific issues raised in the document by 5 February 1999 to:

Laurence Green
Radiocommunications Agency
Strategy Unit
Wyndham House
189 Marsh Wall
London E14 9SX
or by e-mail to:
laurence.green@ra.gsi.gov.uk

It would be helpful if lengthy documents could be supplied on disk, preferably in Word 6.0 or WordPerfect formats, as well as in printed form.

Please note that:

in the interests of open government, responses will be published, together with the names and contact details of authors, unless confidentiality is requested;

unconditional permission to publish responses will be assumed unless the author explicitly requests otherwise;

any copyright attached to responses will be assumed to have been relinquished unless expressly reserved;

the provisions of the Data Protection Act apply to information in electronic form.

1.13 Further copies of this document may be obtained free of charge from:

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2 The present position

2.1 Under present legislation, Wireless Telegraphy Act licences are not transferable between licensees. Except in the special case where the licensee is a company and its share capital is acquired (so there is no change in the legal personality of the licensee), transfers involve the revocation of the original licence and its re-issue to the new user. This can be a cumbersome process and introduces a degree of uncertainty in that it relies on the exercise by the Secretary of State of his discretion to issue the new licence. It has the drawbacks that:

licensees cannot dispose of surplus spectrum or acquire new assignments except through the medium of the Agency;

there are practical difficulties when businesses are bought other than by way of share capital (eg if the business is not a limited liability company or the assets or goodwill, rather than the share capital, is purchased); and

there are unwelcome complications when ships or aircraft are sold and a fresh radio licence has to be obtained by the new owner.

2.2 It is also possible for a licensee to allow another person to use the licensed equipment but this is not always practicable as the original licensee remains responsible for compliance by the other person with the terms and conditions of the licence.

2.3 The introduction of spectrum trading would require legislation to allow licences to be assigned, wholly or in part, from one person to another. Some forms of spectrum trading are also incompatible with the EU Licensing Directive. Clearly, it would not be possible to introduce forms of spectrum trading that were incompatible with Community law. The Radiocommunications Agency is discussing the position with the European Commission.

Previous consultations

2.4 The consultative document The Future Management of the Radio Spectrum published by the Radiocommunications Agency in March 1994 and the White Paper Spectrum Management: into the 21st Century (Cm 3252, June 1996) raised the possibility of reforms beyond spectrum pricing, including the introduction of spectrum trading.

2.5 Responses on spectrum trading were mixed in both cases. There were differences of view about whether spectrum trading would provide incentives to dispose of excess spectrum and make it easier for users to acquire spectrum. Many respondents considered there would be a need for a spectrum market to be regulated to protect small businesses and prevent hoarding. There was support for restricted spectrum trading to make it easier to transfer licences between businesses when they change hands and there is continuity of use. These points have been taken into account in the proposals in this document.

Experience overseas

2.6 The most radical approaches to spectrum trading have been adopted in Australia and New Zealand. Developments in those countries are summarised for information at Annex A. However, they are of limited relevance to the UK as circumstances here are significantly different. In particular, the closer proximity of neighbouring states means that international obligations, including co-ordination requirements, memoranda of understanding, CEPT *5 Decisions and EU Directives, make it necessary to impose tighter restrictions on the uses made of the spectrum and, in some cases, on the technical specification of the equipment used.

3 General approach to spectrum trading

Advantages of spectrum trading

3.1 With the introduction and implementation of spectrum pricing, the circumstances will exist in which spectrum trading could, in some circumstances, offer significant benefits to the economy by promoting the more effective distribution and utilisation of radio spectrum.

3.2 It should be emphasised that market forces are not seen as a complete substitute for spectrum management. For the reasons explained in more detail below, it is envisaged that spectrum would continue to be planned by the Agency in order to ensure compliance with international obligations and to avoid harmful interference; and that spectrum trading would take place within an overall framework of spectrum management.

3.3 Within that framework, spectrum trading could have considerable advantages. The market is a powerful mechanism for distributing resources so as to maximise economic benefits for businesses and consumers and to generate job opportunities. Spectrum trading is a potentially valuable complement to regulation and spectrum pricing and can offer several advantages over regulation alone in terms of:

economic benefits, including for consumers, and jobs. A market would empower users to redistribute spectrum to best effect, facilitating competition, innovation and growth. A central spectrum manager cannot have as complete or as up-to-date information as the users themselves of spectrum they have but do not need or their requirements for additional spectrum. Consequently, relying on regulation alone may well lead to a sub-optimal distribution of spectrum and loss of economic benefits;

enhanced incentives for spectrum efficiency and easier access to spectrum. Spectrum pricing gives licensees incentives to use spectrum more efficiently as they can reduce their fees by relinquishing spectrum. Spectrum trading would reinforce this by enabling them to realise the value of unused spectrum through the market. Conversely, businesses that could utilise licence rights more advantageously would be able to acquire them through the market, with advantages of speed and flexibility, instead of through a regulatory procedure;

greater responsiveness and less uncertainty. Access to spectrum could be transferred more quickly between users or uses of spectrum. Redistributing licences by purely regulatory means requires licensees to be given reasonable notice of variation or revocation of their licences and an opportunity to make representations. This takes time and gives rise to uncertainty;

increased flexibility. A market in spectrum access would provide significantly greater freedom to respond to market opportunities and technical change, especially where licensees can be given a measure of flexibility as to the use they may make of their assignments, and facilitate market entry;

better service. Licensees would receive a more responsive, less burdensome and more efficient service. For example, it could be made simpler for the seller of a business, ship or aircraft to transfer the licence more easily when it changes hands. The transferee could also enjoy the unexpired term of the licence. In the case of licences for which fees are paid annually, the transferee would not have to pay the fee until the date the next payment is due. The Agency expects to be able to simplify transfers of licences under the present legislation when the necessary information systems have been installed but the process could be simplified further under a system of spectrum trading.

3.4 It is recognised that some of these advantages will be more relevant to some licence classes than to others. It is also recognised, as discussed in more detail in paragraphs 4.6-4.12 and section 5 below, that some forms of spectrum trading may not be suitable for all licence classes. The Agency therefore proposes a flexible approach that would enable spectrum trading to be introduced selectively according to the characteristics of the licence class.

The continuing need for spectrum management and regulation

3.5 As mentioned above, even under a system of spectrum trading, there would continue to be a need for regulation. Because of the need for frequency planning to avoid harmful radio interference and the need to comply with international obligations on radio use, including in relation to certain aviation and maritime services, spectrum management could not be left entirely to market forces, especially in view of the density of radio use in parts of the UK and the UK's geographical proximity to continental Europe. There would also be a need to ensure that essential services, such as the armed forces and emergency services, have access to the spectrum they require for their operational needs.

3.6 Spectrum trading would have to take place within a clear and effective framework of spectrum planning and regulation in order to ensure:

compliance with international regulations. It would not be compatible with the European and wider international obligations on radio use to give licensees a completely free hand as to the use to be made of spectrum. There would need to be restrictions at the allocation level on the types of service that may be provided in particular frequency bands, although it may be possible to allow some flexibility where this is consistent with international obligations and does not risk causing interference to other services in the UK or other countries. This is more likely to be the case at higher frequencies above 40 GHz, which are now being opened up for new interactive services, as radio signals at such frequencies attenuate more rapidly with distance;

prevention of harmful radio interference, especially where a spectrum transaction leads to a change in use of the assignment. Radio signals can interfere with each other, even over considerable distances. The effect can be to reduce or destroy the usefulness of the signals and the resulting costs may not be fully reflected in market prices.

The effects can be complex. For example, signals from two users may not interfere with each other but could nonetheless combine to affect a third party. It is necessary to plan the spectrum carefully in order to minimise the scope for interference;

spectrum management objectives, including spectrum efficiency. Spectrum management would continue to have a key role to play. Radio spectrum would continue to be planned strategically in order to ensure efficient use overall in accordance with the Agency's Spectrum Strategy; and regulation would continue to be employed where necessary as a complement to spectrum pricing to deter hoarding.

It would also be necessary to ensure that disposals of spectrum did not prejudice licensees' ability to meet any obligations, such as for network roll-out, to which they are subject;

competition and choice. There would have to be effective controls to prevent large users from acquiring a dominant position in the market for spectrum and using this to manipulate prices or to exclude competitors.

The Agency would also aim to maintain diversity in radio use so that customers have a choice between different and competing radio services, for example self-provided systems or public networks, to meet their communications needs. This is an important corollary of the commitment to maintain competition and choice.

Spectrum trading would take place in the context of the general competition law 6, which would provide for the concurrent exercise of powers by the Director General of Telecommunications in respect of commercial activities connected with telecommunications. The Director General also has powers under the Telecommunications Act 1984 to introduce ex ante licence conditions aimed at promoting competition and choice. But specific provisions in the Wireless Telegraphy Act to regulate spectrum trading and tailored to the needs of spectrum management would also appear to be desirable. These could include 'use it or lose it' provisions or power to withhold consent to transactions or reverse transactions (see paragraphs 3.7-3.8 below). The Agency would welcome views on the need for additional powers.

In the case of broadcasting, spectrum trading would also be subject to the statutory provisions to maintain plurality and diversity. Wireless Telegraphy Act licences for broadcasting spectrum are currently issued only after Broadcasting Act licences have been issued by the Radio Authority or the Independent Television Commission. Spectrum licence transactions relating to broadcasting spectrum or use of spectrum for broadcasting purposes would require clearance by the appropriate broadcasting regulator to maintain consistency with overall broadcasting policies, including those on ownership and universal service. The Agency would welcome views on the extent and shape of the provisions that would be needed to ensure this;

up-to-date information on frequency assignments. It is proposed that spectrum licence transactions would have to be notified to the Agency so that the national frequency register could be kept up to date. This is essential both for the proper functioning of the spectrum market and also for purposes of enforcement and interference investigation.

3.7 As part of this framework, and to enable an appropriate degree of oversight of the market, it is proposed that spectrum transactions should require the consent of the Secretary of State. The aim would be to make this process as straightforward as possible, consistent with spectrum management objectives. Failure to obtain the Secretary of State's consent or furnishing misleading or false information to gain that consent would make any purported assignment ineffective, could constitute a criminal offence under existing provisions of the Wireless Telegraphy Act 1949 and might lead to revocation of the licence.

3.8 The expectation is that refusal of consent would be the exception rather than the rule and would occur only if the proposed trade would, for example:

have undesirable effects on competition;

be incompatible with spectrum management objectives, including any obligations, such as on roll-out, imposed by the licence;

lead to a breach of international obligations; or

give rise to undue interference to other users.

The circumstances in which consent would be withheld could be set out in guidelines. This would enhance regulatory certainty while maintaining flexibility to respond to market developments.

3.9 Purchasers of Wireless Telegraphy Act licences would themselves be responsible for obtaining any other licences, for example under the Telecommunications Act or the Broadcasting Acts, that they required to provide their service.

Views are sought on the general issue of the introduction of spectrum trading in the form of (a) simple transferability of assignments and (b) the selective application of more complex variants as outlined in this document; and, in particular, on:

1) the balance between spectrum management and market forces, the proposed regulatory framework for spectrum trading outlined above and whether other restrictions would be necessary or desirable;

2) the need for specific Wireless Telegraphy Act powers, in addition to general competition legislation and existing powers in relation to telecommunications and broadcasting, to prevent anti-competitive practices in relation to spectrum trading.

4 How spectrum trading could work in practice

a) What would be traded: apparatus licences or spectrum property rights?

4.1 A distinction may be drawn between 'apparatus licences' and 'spectrum property rights'. An 'apparatus licence' confers permission to use or install radio equipment in accordance with terms and conditions set out in each licence or imposed through regulations and usually prescribes the type of service that may be offered and the technical characteristics of the equipment used.

4.2 A 'spectrum property right', on the other hand, gives the owner considerable freedom to select the type and location of equipment and the service to be provided as long as defined interference limits are not exceeded at the geographical and frequency boundaries of the property. Annex A gives further details of this approach.

4.3 In the UK, section 1 of the Wireless Telegraphy Act 1949 gives the Secretary of State a wide latitude in framing licence terms and conditions. It is possible in principle for a licence to confer considerable flexibility as regards the use made of the spectrum and the technical characteristics of the equipment. A licence under section 1 could therefore assume many of the characteristics of the spectrum property rights introduced in Australia and New Zealand and be made tradable, subject to regulatory requirements that could be applied through licence conditions or by the legislation.

4.4 As discussed above, it will be necessary in some bands to restrict the use that may be made of the spectrum because of international obligations and the need for co-ordination with neighbouring states to ensure interference-free sharing of spectrum across national boundaries. Especially where a band has different uses in the UK and in other countries or is already intensively used, the scope for licensees to be allowed to introduce new applications or technology might need to be limited. Some flexibility will be possible, however, especially at higher frequencies or in virgin spectrum, within specified technical parameters selected to comply with international obligations and minimise interference. The greater the flexibility, the more the opportunities for trading.

4.5 The transition from apparatus licensing to property rights would be a complex process to manage. A move to spectrum property rights would considerably complicate the introduction of spectrum trading and appears not to be essential. However, it is a possible development for the longer term.

Views are sought on:

3) the introduction of spectrum trading on the basis of licensing under section 1 of the Wireless Telegraphy Act 1949 without converting to spectrum property rights;

4) the extent to which it would be feasible or beneficial to give users flexibility to change the use to which assignments are put without applying for a new licence.

b) Ways in which licences could be traded

4.6 The spectrum market would complement, not replace, the issue of licences by the Agency. Spectrum trading would enable users to be given a choice in some cases between obtaining a licence from the Agency direct or acquiring one on the spectrum market. The availability of an alternative supply of spectrum would broaden choice and increase opportunities. Public and private sector suppliers co-exist and work in tandem in other sectors of the economy, for example, housing, health and education, and there seems no reason why this should not also be the case for spectrum.

4.7 Spectrum licences could be traded in various ways or 'modes'. Radio users have different needs. Some require spectrum on a short term basis. Others need it for a longer period. Market mechanisms will best meet customers' requirements and enhance economic benefits if there is a variety of modes of trade. To pursue an analogy with land, property can be traded in several different ways. For example, it is possible to acquire property on an extremely localised and short term basis such as a hotel room for a single night; a short term tenancy of a larger property, such as a flat or house for a period of weeks or months; a leasehold for a period of years; or freehold, conferring perpetual property rights.

4.8 In the case of spectrum, it would not be feasible to grant a permanent right akin to property freehold. It is necessary from time to time to change the use made of particular frequency bands, clear it of existing users or re-assign it. This may be for reasons of technical change, to comply with international obligations or to meet the needs of national security. For this reason, it is necessary to retain the present discretion to revoke or vary licences. It would be difficult to reconcile this with a freehold spectrum property right.

4.9 Possible modes of trade for spectrum range from straightforward assignment for the term of the licence to sub-division of an assignment for the term of the licence or a shorter period. Some examples are described in the box on the next page.

4.10 Some of these may be more appropriate or beneficial for some licence classes than for others. For example, for relatively localised private business radio licences, the most frequent type of trade could be where a business acquires a neighbouring assignment in its entirety in order to extend coverage area without any change in the use made of the spectrum (as at Mode 2 detailed in the box below). The licensee of a national channel, on the other hand, has greater scope to sub-let part of the assignment (as at Mode 4).

4.11 Delegation (Mode 1) and leasing or sub-letting (Mode 3) raise the issue of the status of the transferee's licence should the transferor's be revoked for any reason. Where revocation is necessary in order to clear spectrum for an alternative use, for example to meet an international obligation, it may also be necessary to revoke the transferee's licence. However, where revocation was due to a cause such as the transferor's failure to comply with a licence condition, this might, depending on the circumstances, not affect the transferee's rights.

4.12 The Agency recognises that the various licence classes have different characteristics and a trading mode that suits one licence class may not be appropriate for another. In introducing tradability, it will be necessary to have regard to the characteristics of the licence class and tailor the trading modes that are allowed accordingly, as well as any particular regulatory requirements that need to be imposed for spectrum management, competition or other policy purposes. This is discussed in more detail in section 5 below.

Views are sought on:

5) ways in which users would intend to take advantage of tradability and the licence classes for which different forms of spectrum trading would be particularly beneficial;

6) whether there are trading modes other than those described that should be considered;

7) the extent to which more complex trading modes should be permitted in different licence classes.

c) Relationship between licence fees and spectrum market prices

4.13 It is possible that prices on the spectrum market might from time to time diverge from licence fees charged by the Agency. This could occur because spectrum shortages develop or because the value of the spectrum changes as a result of technical or market developments or changes in allocation policy. In general, divergence is more likely to arise where fees are set by regulation through administrative pricing 7 than where they are set directly by the market through an auction.

4.14 If the value of licences on the spectrum market rose above the licence fee, there would be an opportunity for licensees to profit by trading their licences in the market, although it should be noted that not all increases in the value of spectrum would necessarily represent windfall gains 8. From a theoretical economic point of view, the existence of windfall gains is immaterial to the objective of distributing spectrum in the most economically efficient manner and maximising economic welfare. On the other hand, the existence of windfall gains could indicate that the original licence fee was set too low and that taxpayers had not received a fair return from making available the valuable radio spectrum resource.

Clawing back windfall gains

4.15 The possibility of windfall gains could be reduced by adjusting the administrative pricing fee to bring it more into line with the spectrum market price. Moreover, if there was a change in use of the spectrum that was outside the terms of the original licence, there would be little risk of windfall gains. This is because it would be necessary to obtain from the Agency a new licence, which could then be priced to reflect the change in circumstances or auctioned.

4.16 One issue on which views are sought is whether there would need to be an additional mechanism to recover for the taxpayer some or all of the increase that may arise in the value of a licence between its original grant and a later sale, and if so, the form it should take, the circumstances in which it should apply and how to assess the amount to be recovered. The primary purpose of spectrum pricing is to manage the spectrum and enhance spectrum efficiency, economic benefits, innovation and competition - not to maximise revenue - but such a mechanism could help ensure that the taxpayer receives fair consideration for the licence. Arguments against such a provision are that it would:

inhibit the operation of the market in maximising economic efficiency. If windfall gains were to be recovered, some transactions that could generate additional GDP, consumer benefits and jobs could become unattractive and so would not take place. Spectrum would not be distributed optimally. The cost to the Exchequer in terms of tax revenues on economic activity foregone could be considerable and might well exceed the additional proceeds from sales of licences. New market entrants would find it more difficult to gain access to spectrum and consumer benefits would be lost 9;

inhibit innovation and enterprise. In assessing the amount to be recovered, it would be necessary to take into consideration the reasons for the increase in value. Some of this might be due to the enterprise of the licensee in developing the service rather than any fortuitous events outside the licensee's control. If there was a risk that gains from a licensee's activities would be wrongly classified as windfalls, this would reduce expected returns from innovation, reduce innovative activity and be detrimental to the economy;

be complex to administer. It would be necessary to differentiate between windfall and other gains, which may not be straightforward. It would also be necessary to consider, on grounds of equity, whether there should be a provision to reimburse licensees if licence values fell. The complexity would engender uncertainty, which would be detrimental to the development of the market and to the economy and could also discourage bidders from taking part in auctions of licences.

4.17 For these reasons, the Agency would not currently advocate any additional power to recover increases in spectrum value when licences are traded. However, views on this point would be very welcome.

Speculation in spectrum

4.18 It is possible that speculators might enter the market to acquire spectrum in the expectation of an increase in its value. In economic theory, speculation in a commodity is not necessarily undesirable and may even be benign. It may be prudent to keep some spectrum in reserve against future contingencies and it is recognised that businesses may from time to time acquire licences in advance of exploiting the spectrum, for example if they are engaged in rolling out a network. However, if spectrum is kept unused, this may act as a barrier to new market entrants and incur immediate economic loss in terms of benefits foregone. This loss may, as pointed out above, be substantial. As a general rule, speculation would not appear to be conducive to sound spectrum management and could impose sizable opportunity costs.

4.19 The radio spectrum is different from many other commodities because the extent of externalities, in the form of radio interference, makes a high degree of planning essential. Because of this, and in view of the economic and strategic importance of the radio spectrum, it is arguable that the Agency should use licensing and pricing powers to discourage speculative hoarding, for example by enforcing a 'use it or lose it' policy. The Agency would welcome views on whether other mechanisms are necessary.

Views are sought on:

8) the need to distinguish in the implementation of spectrum trading between licences that have been auctioned and licences that are subject to administrative pricing;

9) what mechanisms would be desirable to minimise the opportunity for windfall gains and to control speculation under a system of spectrum trading and, in particular, whether there should, in some circumstances, be provision to recover windfall gains.

d) Timing

4.20 Spectrum trading could not be introduced until UK and European legislation has been amended. The timing of this is, at this stage, uncertain. The Commission intends to review the Licensing Directive in 1999 and the results of that review cannot be predicted with any certainty.

4.21 In any case, there could be adverse consequences if spectrum trading was introduced prematurely. Spectrum pricing is in the initial stages of implementation and most licence fees are still at the levels set under the previous cost-recovery regime. This means that licence fees in areas of spectrum congestion may, in some cases, be some way below the value of the spectrum that would emerge on a spectrum market. Introducing spectrum trading in circumstances in which there were marked discrepancies between licence fees and market prices would lead to a substantial risk of windfall gains at the expense of the taxpayer, speculative applications for licences and a disorderly market.

4.22 It is envisaged that a flexible approach would be adopted to the timing of the introduction of spectrum trading. Spectrum trading would not be introduced for all licence classes at the same time but could be phased in class by class in step with spectrum pricing as follows:

licence classes subject to administrative pricing would not be made tradable until spectrum pricing was fully applied. Present proposals for phasing in administrative pricing are described in the consultative document, Spectrum Pricing: Implementing the Second Stage, published by the Radiocommunications Agency in September 1998. As noted above, timing would also be conditional on the amendment of UK and European legislation to permit spectrum trading;

where licences are auctioned, the licence fee should reflect the market value at the time of the auction, even if that value subsequently changes as a result of market developments. It is for consideration whether licences that are auctioned should normally be made tradable, subject to regulatory constraints discussed above.

Universal Mobile Telecommunications Systems (UMTS)
On 18 May 1998, Mrs Barbara Roche MP, Minister for Small Firms, Trade and Industry, announced the intention to hold an auction of UMTS licences in the summer of 1999, subject to market and other developments and to final decisions nearer the time. The legal position on spectrum trading is not expected to change before then. However, views are invited on the proposition that, should legislation permit, UMTS licences should become tradable. The Government's intentions on this point would be made clear before the auction.

Views are sought on:

10) (a) the proposals for a selective, phased introduction of spectrum trading; and

(b) whether UMTS licences should be made tradable, should legislation permit.

e) Term of licence and security of tenure

4.23 Uncertainty about security of tenure will tend to depress the spectrum market. On the other hand, it is necessary for the Agency to retain a degree of flexibility to revoke or vary licences to comply with international obligations or to facilitate spectrum re-farming on spectrum management grounds. There is also a need to balance the need for stability to encourage investment against the desirability of flexibility to facilitate innovation and fresh competition. The Secretary of State has wide discretion to revoke or vary licences, but, except for non-payment of fees, these are exercised sparingly. Under section 4 of the Wireless Telegraphy Act 1998, he may grant licensees greater security of tenure by specifying the circumstances in which licences will be revoked or varied.

4.24 At present, Wireless Telegraphy Act licences continue in force until revoked or surrendered, subject to payment of the renewal fee, which in nearly all cases is annually. This is for the convenience of users since it relieves them of the need periodically to apply for new licences. Because of the need for annual fee payments, licences of this type are sometimes wrongly described as annual licences: in fact they are perpetual until revoked. If such a licence were traded, the transferee could, depending on the mode of trade employed, become liable to pay annual fees in addition to the price paid to the transferor.

4.25 In contrast, licences that are auctioned are likely to be for a fixed term of a number of years; and spectrum property rights in New Zealand and Australia are also for a fixed term. This raises the issue of whether it would facilitate the operation of a spectrum market if all Wireless Telegraphy Act licences were made for a fixed term instead of being perpetual. If this change were made, existing perpetual licences could be converted on payment of the requisite fee, which could be based on the net present value of the annual licence fees over the lifetime of the new licence.

Views are sought on:

11) whether the basis of licences that are tradable should be changed from perpetual to fixed term;

12) if so, how long that term should be for the various licence categories.

f) Information and confidentiality

4.26 In order to function effectively, markets need information. Potential sellers need to gauge interest in, and to advertise, their surplus assignments. Potential purchasers need to know what is available and the price that is being asked. The Agency already has plans, for reasons of good spectrum management and open government, to publish a frequency assignment database giving information about individual assignments. This is planned to be done as soon as the Agency has the necessary IT systems in place and would assist the functioning of a market in spectrum.

4.27 However, it is recognised that some assignment information needs to remain confidential for reasons of national security, law enforcement or commercial sensitivity. For example, identities of licensees might be withheld during commercially sensitive periods, such as network roll-out. There will be further consultation on the assignment information that should be made available.

g) Market mechanisms

4.28 There would need to be some mechanism in a spectrum market to bring buyers and sellers together. At its simplest, this might involve advertising or publication of a frequency database. More complex mechanisms involving intermediaries might evolve over time. If intermediaries were permitted to acquire blocks of spectrum for resale, this could add depth to, and facilitate the functioning of, the market.

4.29 However, it would be necessary to ensure that intermediaries met certain criteria. For example, they should have to be able to demonstrate technical competence, financial stability, independence and impartiality; act fairly; and provide an acceptable standard of service. There would need to be sanctions against any that failed to meet these criteria and strict controls to ensure that they did not assign licences in a way that caused interference to radio users other than their own customers. The resulting regulatory complexity and fragmentation of spectrum management might adversely affect the overall spectrum efficiency that could be achieved.

Views are sought on:

13) how the market might work in practice, the types of market mechanisms that might evolve and how these should be regulated;

14) whether it would be advantageous to develop the concept of market intermediaries.

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5 How spectrum trading might be applied

5.1 As discussed above, the Agency envisages that spectrum trading would be introduced selectively. The various trading modes are likely to be more beneficial for some licence categories than others, depending on the characteristics of the licence type and radio service in question. In general, there would probably be a close correlation between the use of spectrum trading and spectrum pricing as spectrum management tools.

5.2 Factors that could need to be taken into account in introducing spectrum trading include the following:

whether licences are auctioned or subject to administrative pricing. As discussed above, it is for consideration whether the application of spectrum trading should distinguish between licences that have been auctioned and those that are subject to administrative pricing;

the existence of spectrum congestion. Licences would continue to be available from the Agency direct in most cases, as well as through the market and there may be less need for spectrum trading for licence types or in geographical areas where the Agency has no difficulty in making spectrum available to meet demand;

the size and extent of individual assignments. The more complex trading modes are likely to be more beneficial where individual assignments occupy a sizable bandwidth and extensive geographical area and spectrum is not shared as there will then be more scope to divide assignments. For relatively small assignments, such as individual private business radio systems or fixed links, the transaction costs and additional administrative complexity involved in spectrum trading may mean that more complex modes (i.e. other than simple transfer of licences) offer insufficient advantage to users to be worthwhile.

For example, those wishing to acquire or dispose of assignments would have to find counter-parties with whom to trade and, especially in bands and areas that are heavily congested, would need to develop or acquire sufficient technical expertise to fit in with the band plan if overall spectrum efficiency were not to be compromised;

additional complexity in overall spectrum planning and co-ordination. The introduction of spectrum trading would complicate overall spectrum planning, especially where large numbers of individual assignments have to be accommodated in limited spectrum and stringent technical planning criteria have to be applied. In some cases, for example in some fixed links or private business radio bands, changes in the boundaries of individual assignments may have wider implications for the overall band plan; and centralised spectrum planning by the Agency may achieve greater spectrum efficiency than market forces.

5.3 For example, in the case of private business radio (PBR), users self-provide radio systems for their exclusive use. The spectrum set aside for PBR is made available to its very many users through some 100,000 individually tailored assignments, which take account of each one's particular requirements, geographical location and effect on other users in the same locality. Most PBR channels are shared, both in terms of being reused in different geographic locations and used by more than one licensee in any particular location. There are some channels which are made available to single users on a local or national basis but in these cases the channels have been set aside for a specific application.

5.4 In the light of the above, it is considered that spectrum trading is only likely to be helpful for PBR in easing transfers of licences from one licensee to another where all assignment details, other than the licence holder, remain unchanged. The fragmented and interwoven nature of these very many assignments is unlikely to be conducive to any other form of spectrum trading.

5.5 The table on the next page is illustrative of the possible application of spectrum trading. It indicates for the main licence categories whether spectrum trading would appear to offer advantages and, if so, which trading modes might be made available.

The Agency would welcome comments on:

15) the proposals in this section on how spectrum trading and the various trading modes might be applied in practice to different licence categories.

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6 Regulatory Impact Assessment

6.1 In considering proposals for new legislation, the Government seeks views from business on the likely effects in terms of compliance costs and benefits. A Regulatory Impact Assessment (RIA) is produced for all UK and European Community regulatory proposals affecting business. A draft RIA for spectrum trading is attached at Annex B.

To aid the production of a RIA, it would be helpful to have comments on:

16) (a) the draft RIA;

(b) the likely cost implications and any cost savings or other benefits which would be likely to arise as a result of the proposals in this document; and

(c) the areas where the main costs and benefits are likely to occur and which are recurring and which are non-recurring, expressed both as an absolute amount and as a percentage of annual turnover.

Radiocommunications Agency,

Department of Trade and Industry

October 1998

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RA 335 (October 1998)