This paper outlines the scenarios presented at the December meeting and formally invites members of the FWACC and other interested parties to comment on these scenarios.

Responses in writing to this paper are requested by 5:00 pm on 26 January 2001 and should be addressed to:

On 20 October 2000, Patricia Hewitt, Minister for e-Commerce and Small Business announced the consultation on the Government's plans to make available spectrum licences for FWA services at 3.4 and 10 GHz.

FWA, also known as Radio Fixed Access (RFA) or radio in the local loop (RLL), is the use of radio spectrum to provide "last mile" connectivity between users and fixed telecommunications networks. The spectrum in the 3.4 and 10 GHz bands could provide a medium for delivering always-on Internet, telephony and data services using FWA.

The Radiocommunications Agency ("RA") is proposing to offer 2 x 30MHz of spectrum (10.16 to 10.19 GHz and 10.51 to 10.54 GHz) in the 10GHz band and 2 x 17MHz of spectrum (3425 to 3442 MHz and 3476 to 3493 MHz) in the 3.4 GHz band. The available spectrum was formerly awarded to Ionica plc, which went into administration in October 1998.

The RA has appointed WS Atkins Management Consultants and Schema to advise on the technical, financial, economic and market issues of the award of spectrum licences for the 3.4 and 10 GHz bands. The RA's advisers have undertaken detailed market studies, which included interviews with operators, equipment suppliers and lending institutions, as well as modelling a range of cost, revenue and financial scenarios. Their preliminary findings were presented to the FWACC on 13 December 2000.

A copy of the presentation made by the advisers along with a full transcript of the meeting on 13 December 2000 can be found on the RA's website (www.radio.gov.uk). The methodology used by WS Atkins Management Consultants and Schema was presented to the FWACC on 23 October 2000 and a copy of their slide presentation along with a full transcript of the meeting on 23 October 2000 can also be found on the RA's website.

Based on their preliminary findings, the RA's advisers presented a series of scenarios for the packaging and delivery of spectrum licences in the 3.4 and 10 GHz bands. These are listed in sections 2 and 3 below.

Each scenario will need to be evaluated fully in the light of five key objectives:

• to ensure efficient and effective use of the available spectrum
• to develop a simple and robust process to ensure the available spectrum is awarded to those who will maximise economic value
• to promote competition and the development of innovative services
• to allow operators with viable business cases to compete or bid
• to avoid sterilisation of rural areas. The recent White Paper entitled: "Our Countryside: The Future" ("Rural White Paper") expresses the Government's intention to stimulate and promote industry investment in higher bandwidth services so that as many people in rural areas as possible can get access to broadband services.

This scenario would comprise either one or two national licences (combining the available spectrum in the 3.4 and 10 GHz bands) or two national licences (one for each of 3.4 and 10 GHz).

Scenario 1 involves a simple approach and is a configuration favoured by at least some of those polled during the qualitative research exercise carried out by the RA's advisers. However, Scenario 1 creates a risk of sterilisation of rural areas if, for example, a national licensee is planning limited roll-out in terms of geographical scope. In this scenario, the RA might not be able to re-license the same spectrum for other operators to use.

Scenario 2 would comprise either three or four regional areas, and could lead to either three or four licences or six or eight licences (depending on whether the 3.4 and 10 GHz spectrum is combined or awarded separately). It is important that any licence regions would be defined by using a knowledge of the subscriber concentrations needed to generate a viable business case rather than by arbitrary geographical boundaries. Each regional licence would attempt to strike a balance of suburban, city and rural areas.

Scenario 2 is similar to Scenario 1 but more complex because of the number of licences awarded. Scenario 2 could also fail to address the issue of sterilisation, in the absence of any claw back mechanism or requirement of the licensee to roll out to rural areas.

Scenario 3 comprises an as yet undetermined number of licences which correspond to UK metropolitan areas based on subscriber concentrations in cities and suburban areas. A number of metropolitan areas are currently being considered. Again, combined licences for the use of 3.4 and 10 GHz or separate licences for each 3.4 and 10 GHz could be awarded. Scenario 3 assumes that potential bidders for national or regional licensees will not roll out services in rural areas, which is consistent with the responses obtained in the qualitative market research.

Scenario 3 has the advantage of minimising sterilisation. It would, however, require the RA to design a different mechanism for awarding spectrum licences in rural areas before it awards all of the available spectrum at 3.4 and 10 GHz. The RA has not yet formulated a view, but such a mechanism could include the award of licences in rural areas on a first come, first served basis. The RA welcomes the views of industry on this important issue.

Under Scenario 4 the RA could decide not to award the available spectrum at 3.4 and 10 GHz on the basis that there are unlikely to be any viable business cases where an operator can make an efficient market entry. Scenario 4 could be advantageous if other spectrum, complementary to the spectrum at 3.4 GHz and 10 GHz, can be packaged with 3.4 and 10 and sold together.

Scenario 5 could be advantageous if it were better in terms of competition, or for end users, to use available spectrum at 3.4 and 10 GHz for purposes other than FWA, such as backhaul for 2G and 3G services and Fixed Satellite Services.

In addition to spectrum packaging outlined in Section 2 above, a number of overlapping factors need to be considered in designing an award process, including the means of payment, the terms and conditions of a licence and the means of assignment.

The RA is considering using three possible means of payment: (1) prepayment of fees; (2) annual fees and (3) royalties.

Prepayment of fees is transparent, useful to promote innovation and may encourage quicker roll-out as a means to recoup the prepayment of the relevant fees. This method was used for the recent 3G and BFWA award processes. Lending institutions are also more likely to closely scrutinise the business plans of potential applicants if prepayment of fees is required.

Annual fees may have the advantage of easing any credit constraints on applicants, especially smaller operators. However, annual fees may fail to promote efficient use of the spectrum if an operator acquires a licence with the intention of surrendering it whenever business conditions are unfavourable.

Royalties could minimise the risk to licensees of overvaluing the available spectrum as the licence fee would be tied to the actual value or benefit the licensee derives from the use of the licence. On the other hand, royalties are likely to be passed on as higher prices to consumers. Royalties also share the advantages and disadvantages of annual fees.

Possible licence conditions could include a "use-it-or-lose-it", "build-it-or-loose-it" or roll-out obligations. The latter in particular may be unattractive to licensees. Licensees could also be incentivised to roll out by the prepayment of fees, by the imposition of financial penalties or by the offer of a rebate on licence fees for rolling out, subject to any legal constraints under the Licensing Directive or other obligations under the EC Treaty. However, the RA is keen that it should not be seen to be micro-managing the market by stipulating roll-out obligations and is interested to receive comments from operators on the methods by which operators may be able to define their own "use-it-or-lose-it" conditions.

The RA is considering the following means of assignment:

• auction
• comparative selection
• hybrid of comparative selection and auction, for example, a comparative selection process to set a minimum quality and amount bid, as criteria
• first come, first served; the RA is exploring this method to allocate spectrum in rural areas if it decides to award "Hot Spot" licences.

The RA invites the views of industry and other interested parties on the Scenarios under consideration for packaging and delivering the available spectrum at 3.4 and 10 GHz. Responses in writing to this paper are requested by 5:00 pm on 26 January 2001, and should be addressed to:

Written comments will be published on the RA's website except where respondents indicate their responses, or parts thereof, are confidential. Respondents should therefore place any confidential information into an annex which is clearly marked as confidential.

Responses (February 2001)