1. Title: Proposals for implementing the second stage of spectrum pricing for licences issued under the Wireless Telegraphy Act 1949.

1(i) This RIA has been published in the light of comments received on the "Consultation Document on Proposals for Spectrum Pricing : implementing the Second Wave", published in September 1998. They concern changes that will be made in Regulations proposed to commence in July 1999.

Using powers under Section 2 of the Wireless Telegraphy Act 1998, the Secretary of State for Trade and Industry aims to continue the process of phasing in new pricing arrangements for licences in three sectors of radio business use : Public Telecommunications Networks (PTN), Private Business Radio (PBR) and Point - to - Point Fixed Links (FL), by making new fee regulations (The Regulations) and to extend the PBR and FL spectrum priced fees to the Channel Islands and Isle of Man. There is no intention to change the Public Mobile Operator fees in the Islands in 1999.

The objective for the second stage of Regulations is to continue the introduction of spectrum pricing for two radio sectors, PTN and PBR, and to commence spectrum pricing in FL. Briefly, the proposals concern the following types of business :

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

- PBR - e.g. two - way mobile radio for taxis, despatch and delivery services, utilities, local government services, leisure, shopping centres, security; and the introduction of two new PBR licences, the Wide Area Private Business Radio licence and the National and Regional Private Business Radio licence, and the commencement of spectrum pricing in;

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

Available radio spectrum is coming under increasing pressure as a result of rapidly rising demand. Access to spectrum is essential if economic growth is to be sustained. Cost- recovery based arrangements provide little or no incentive for spectrum to be used efficiently. They encourage hoarding and create self-perpetuating shortages. The sectors covered by these proposals are those in which actual or potential spectrum congestion is evident. Further Regulations will be made on an annual basis to cover other sectors (to be covered in future RIAs), and to continue migrating fees over a number of years to the new arrangements, in these three sectors.

3 i) Options

Now that the first set of Regulations are in force, there are two possible options:

Option 1:

The impact of this option is detailed below.

Option 2:

This 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 underlying concept of spectrum pricing (option 1) is that fees should be based on the amount of spectrum used, not on recovering 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 PBR 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 September 1998 Consultation 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 and should facilitate more customer choice. 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 majority of the responses to the September 1998 Consultation Document supported option 1.

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 Radiocommunications 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 in due course (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 £ 1 billion and thousands of jobs if sufficient spectrum were to become available for a new national 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 PBR. 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.

To widen customer choice, the proposals to introduce the two new licences will have the following impact :

The introduction of this licence will encourage users to examine more carefully their spectrum use. It highlights the value of exclusive use of spectrum and the current levels of congestion in particular geographical areas and spectrum bands and frequencies. This class will replace the current Private Mobile Radio (Standard) Licence for many users.

Those that choose to operate in congested areas or use exclusive spectrum must be ready to pay more and are likely to face increases. Licensees who choose to operate in non - congested areas and who are willing to share spectrum will enjoy a decrease in their licence fee. We anticipate the overall effect on licence fee income for PBR will be neutral

National and Regional Private Business Radio Licence

This is intended to be awarded to those who will be supporting the introduction of developing technologies, such as the more spectrally efficient TETRA systems, and will act as a launching platform for such services. It is anticipated that only "professional" licensees would wish to hold this licence.

As this involves the use of prime, exclusive spectrum, licensees must expect to pay more and we anticipate an initial increase in fee charges of about 33%, and an increase of about 25 % for the less popular channels. However, for new services, we propose to introduce the fee changes on an escalator scale whilst the new networks are developed, as suggested by some respondents to the September 1998 Consultation Document.

Should this new licence not be introduced, we would be unable to facilitate the introduction of new radio technologies, which would have an adverse impact on the UK economy.

These 2 new classes, together with the new On-site PBR class introduced last year, provide a range of communication choices for private businesses. Furthermore businesses now have the choice of subscribing to public systems, taking one of the new classes or using one of the lower quality licence exempt services.

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. Option 2 would also result in less choice for customers to review their services and decide to change to other, more efficient and therefore cheaper services.

5(i)Business Sectors Affected

PBR 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 coverage); and a supermarket may have an on-site system at each store.

PTN networks range from the mobile telephony services 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 delivery services).

FL provide the point-to-point wireless infrastructure for about 300 operators of major wired or wireless networks, including 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 a minimum required to achieve efficient use of the radio spectrum, and increases will vary considerably according to each individual use of radio. However licence fees are usually a small component of the running costs faced by most businesses. The companies who make most use of radio are 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. The increase proposed in 1999 is about 40% each. It is difficult to predict the extent to which this increase might be passed on to subscribers. The market is extremely competitive with large increases of subscribers. Even if it were passed on in full it would only amount to 5 pence per subscriber per week at present subscriber levels.

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 £50 to £75 million a year, about £12 million increase for fixed links (for current use of spectrum) and no overall change to other business sectors. But the increase this year is only about £10 million, and future changes would be covered by future RIAs

6. Results of theConsultation

A number of responses were received to the widely circulated September 1998 Consultation Document, which outlined the proposals for implementing the second wave of spectrum pricing. The responses covered a range of issues, but the most often asked questions related to the definition of congestion, the use of any additional revenue generated as a result of spectrum pricing, the use of moderators and escalators and the longer term strategy of spectrum pricing.

It is our intention to continue to apply the present 50% discount for fees for charities whose objectives include safety of life services.

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

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

It is part of the Agency Spectrum Strategy to regularly review current and future demand for spectrum. The Agency republishes 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.

 9. Summary and recommendation

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Licensing Policy Unit Radiocommunications Agency May 1999