Draft Regulatory Impact Assessment

1. Proposals for implementing the second wave of spectrum pricing for licences issued under the Wireless Telegraphy 1949.

1(i) This draft RIA accompanies the consultation document described above. Comments on both documents are invited. A final version of this RIA will be published in the light of comments received to accompany the draft regulations to implement the proposals in this document.

2 (i) The issue and objective

Issue:

The second wave of statutory regulations for implementing administrative spectrum pricing under Section 2 of the Wireless Telegraphy Act 1998 aims to continue the process of phasing in new pricing arrangements for licences in three sectors of radio business use. This version of the assessment links to the consultation documents, but it will be updated before any regulations are made.

Objective:

The objective of the Act is to base charges for licences issued under the Wireless Telegraphy Act 1949 on spectrum management considerations. Consequently fees to install or use radio equipment should reflect more closely the value of spectrum instead of being tied to the fully allocated costs of spectrum management, as was previously required.

A Compliance Cost Assessment for the Act was issued in May 1997, based on the then current proposals to charge licence fees. This RIA updates that assessment in the light of the latest proposals contained in the consultative document "Implementing the second wave of spectrum pricing" issued on 25 September 1998. The objective for the second wave of regulations is to continue applying the new pricing methods for two radio sectors (Public Telecommunication Networks and Private Business Radio) and to extend them to one new sector (Fixed point-to-point links). Briefly, the proposals concern the following types of business :

- public telecommunications - e.g. operators of networks for mobile telephones, pagers, data, common base stations;

- private business radio - e.g. two way mobile radio for taxis, despatch and
delivery services, utilities, local government services, leisure, shopping centres, security; and

- fixed links - e.g. fixed radio infrastructure for communication networks.

More detail of the business sectors is given below at 5.1.

2 (ii) Risk assessment:

Radio spectrum is a finite resource of considerable economic importance. It is coming under increasing pressure as a result of the rapidly rising demand in telecommunications and broadcasting liberalisation. Timely access to spectrum is essential if growth is to be sustained. Cost-based arrangements provide little or no incentive for spectrum to be used efficiently. They encourage hoarding and create self-perpetuating shortages. The three sectors covered by the proposed regulations are those in which actual or potential spectrum congestion is considered to be most marked. It is also proposed to bring forward further regulations on an annual basis to cover other sectors (to be covered in a future RIA), and to continue migrating fees over a number of years, to the new arrangements, in these first three sectors.

.3 (i) Options

Now that the 1998 Act has been brought into force and the first set of regulations passed, there appears to be two possible options:

Option 1: - to bring forward new fee regulations as proposed in the September

consultative document, based on spectrum pricing

Note: the impact of this option is detailed below.

Option 2: - to continue to leave fees frozen at current levels

Note: the second option allows some further control of demand by regulation (e.g. by limiting the number of licences on issue or increasing spectrum sharing - but not altering any licence fees or not introducing any new licence classes). Ultimately congestion can be expected to impose its own limits on spectrum demand. It is probable that within a year or two, this option would put the UK in breach of the EU Licensing Directive if it prevented new services being introduced. It is therefore tenable as an option only for a short period.

 

3 (ii) Issues of equity and fairness

The proposals are inherently fairer than existing cost-based fees, which result in many small businesses paying much more for their licences, in proportion to the spectrum they occupy, than do the large telecommunications operators. Under spectrum pricing (Option 1) the underlying concept is that fees should be based on the extent of the spectrum occupied, not on the cost of administering licences. Whilst this change will result in fee increases for some services, it will also result in fee decreases for users and services which either do not use much spectrum and/or use it efficiently. In bringing forward proposals for the private business radio sector, where there are many small firms involved, the proposals (which also include some rationalisation of licence classes) offer a number of choices. In some cases, users will have a choice between continuing with their current arrangements or switching to alternative radio services that have lower fees or are even licence exempt (for which no fee is payable). Because the proposed fee increases are carefully focused on areas of congestion, or exclusive use of spectrum, most users who share spectrum in the many non-congested areas will enjoy reductions.

Where there are large increases, it is planned to phase these in over a number of years, so that business plans are not disrupted and users can mitigate the effects, e.g. by adapting their use of spectrum.

A common approach is being taken to calculate fees based on the use of standard building blocks (e.g. the Standard tariff units or link reference fees) for calculating the value of spectrum as a raw material in each band. It is also intended to continue this approach for regulations in later years. This approach is explained in detail in the consultative document.

4 (i) Identification of the benefits

The steps proposed in Option 1 will have the benefit of encouraging licensees to consider how they use radio, promoting more efficient use and deterring hoarding and inefficient use. It would also, as indicated above, lead to lower fees for many licensees. Inevitably, since this is part of a staged long term programme, the reality of the benefits will not be evident in the short term.

The only benefit of Option 2 would be a short term saving of effort required in setting new fees and associated changes to information systems in the Agency. Freezing fees at current levels might be seen by many customers as a benefit, but it would be decidedly short term as in time they would find that they were refused any new services (because there would be no more spectrum to allocate) or alternatively more degradation of the quality of assignment.

4 (ii) Quantifying and valuing the benefits

The benefits of Option 1 are:

the proposals would encourage more efficient use of the radio spectrum, resulting in sizeable economic gains in terms of wealth creation, consumer benefits and jobs. More spectrum would become available for existing services to grow and for new services to be introduced. This in turn would have a direct impact on GDP and jobs and the resulting increase in competition would benefit consumers by leading to lower prices. Studies of the economic impact of the use of radio indicate that the economic benefits of greater spectrum efficiency could amount to:

up to billions of £s and thousands of jobs if sufficient spectrum were to become available for a new public service;

£25m a year if spectrum pricing led to the release of 25% of the capacity of the fixed links bands;

£1m a year increase in economic benefits for each percentage point increase in capacity in the private business radio bands.

the removal of distortions in the fees currently charged for private business radio. It is estimated that 60% or more of the current 57,000 licensees would either pay no more than at present or enjoy fee reductions of up to 65%; the minority of licensees who faced higher charges would be given additional incentive to review their use of spectrum and consider options for more efficient use, which might, over time, lead to cost savings for them.

Option 2 (freezing fees) might be seen at first sight to be a benefit by some businesses. However there would be no long term benefit to the UK spectrum, and consequently to the UK economy and thus no value that can be quantified. It would impose costs on the economy in terms of economic benefits foregone.

5(i) Business Sectors Affected

Private business radio covers virtually every sector of the economy and public service ranging from the smallest to the biggest firms and organisations. There are over 50,000 current licences ranging from utilities to the health services, from transport to large and small industry, security to retail and many other types of business. Typically, a utility may have a national or regional network; a taxi firm or local baker may have a wide area system (about 30 kms service); and a supermarket may have an on-site system at each store.

Public networks range from the mobile telephony services now serving most of the community to more specialist data networks targeting on mobile business needs. About 30 licences are issued to public operators and over 900 to specialist common base station operators who provide community business radio subscriber services (e.g. to small businesses such as bakery deliveries).

Fixed Links provide the point-to-point wireless infrastructure for about 300 operators of major wired or wireless networks, including for fixed and mobile telephony or broadcasting, and a few private networks for major industries.

5(ii) Compliance cost for a typical business

Additional compliance costs will arise from the fact that increased licence fees will be payable by some spectrum users for multiple use or for the use of exclusive or congested spectrum. Charges will be kept to the minimum required to achieve efficient use of the radio spectrum, which is a finite resource, and increases will vary considerably according to each individual use of radio. However licence fees are usually a small component of the costs faced by running most businesses. The companies who make most use of radio are generally not small firms and very often some of the biggest UK companies.

For public networks (reflecting their use of spectrum and its value), the increases may be significant against current fee levels. For example a national cellular operator’s licence would increase from around £4 million each this year to over £16 million each in 2000/ 2001 if they were to keep to the same spectrum. It is difficult to predict the extent to which this increase might be passed on to subscribers. The market is extremely competitive. Even if it were passed on in full it would only amount to 20 pence per subscriber per week.

For fixed links in a congested area fees would increase from £925 for a typical 28 MHz link to £1900 over 4 years ( the impact on end-user subscribers e.g. a telephone user, is difficult to predict, but if passed on in full, it would only amount to a few pence per subscriber year). For links in uncongested bands (e.g. 38 GHz) the fee will fall from £720 to £400 per link over the implementation period. Two major operators have exclusive spectrum bands for which the new fees would result in a combined increase of £8.4 million for these bands if retained at the end of the implementation period. However, these operators will be encouraged to review the amount of spectrum they are using and they may be able to mitigate this increase by making more efficient use of spectrum.

The majority of private business radio licensees with services in non-congested areas will enjoy a decrease of fees (e.g. from £150 to £75 for simple one base station services). Only those with exclusive channels, in congested areas and/ or those with multiple systems may see increases. A private taxi or hire firm in London with 25 mobiles would see an increase from £250 to £330 per year (or 8 pence per week per taxi), but no increase in other urban areas, and some decreases in rural areas. Most on-site users outside congested areas will enjoy further reductions and a new licence-exempt class of use proposed may allow shorter range business use (no base stations) at no fee.

5 (iii) Total compliance costs

At the end of the staged 3 to 4 year implementation timetable the annual recurring costs to network operators would be about £75 to £100 million a year, about £12 million increase for fixed links (for current use of spectrum) and no overall change to other business sectors

6. Consultation with small business

A number of small businesses responded to the May 1997 Consultation Document which outlined general principles and specific examples for implementing spectrum pricing. Their main concern was that any increases should not be disproportionate to the size of an organisation and that increase of fees would be accompanied by improvements to the management of the radio spectrum. Some small firms are represented by bodies such as the Mobile Radio Users Association and the Federation of Communication Services, who have both made input to the Agency working groups which have developed the proposals which aim to take account of these concerns. Many other trade associations also responded to the previous consultation papers and will be invited to comment in this consultation round. Newsletters have been sent to all private business radio licensees, informing them at all stages of the evolution of proposals for spectrum pricing, and all are invited to comment on the consultative document.

A number of charities have also commented, and a policy statement in relation to continuing the present 50% discount for fees for charities whose objectives include safety of life services is contained in the consultation document.

7. Other Costs

The costs for implementing the proposals will be absorbed within the existing Agency expenditure plans. There is no change in public manpower as a result of the regulations, the work being absorbed within existing complements under increased efficiency measures.

8. Results of Consultation

The consultation document "Implementing Spectrum Pricing" issued in May 1997 drew a response which broadly echoed previous consultations in accepting the principles of spectrum pricing. Respondents made a number of points, which are set out in Chapter 2 of the new consultation paper, concerning:

the need for fee modifiers;

the need for continued openness and dialogue;

the need to take account of small business interests.

We believe the consultation paper addresses all these issues, and also gives further opportunity to make representations through a number of avenues (e.g. our Roadshow programme, contact through local offices, and more planned publicity) before the Regulations are published for final comment.

9 Summary and recommendation

See table on the next page

The recommendation is to proceed with spectrum pricing regulations for the first three sectors.

10. Enforcement, Sanctions, Monitoring and Review

The Regulations do not alter the statutory powers to act against the illegal use of radio. Such action now needs to take into account the provisions of the EU Licensing Directive, which provides opportunity for the licensee to make representations before a licence is terminated and provides that the Agency must act fairly in dealing with licencees and licence fees.

It is part of the Agency Spectrum Strategy to regularly review current and future demand for spectrum. The Agency aims to republish its spectrum strategy document on a regular basis. This review process will also involve reviewing fee levels, probably on an annual basis, in the light of technical and market developments and in the light of changes in the demand for, and availability of, spectrum.

Licensing Policy Unit

Radiocommunications Agency

September 1998

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