Spectrum Management: Into the 21st Century 7. Administrative Pricing

7.1 This chapter presents detailed proposals, based on the NERA/Smith study, for administrative pricing for mobile radio and point to point fixed links. As described in chapter 5 above, these are the services on which the impact of spectrum pricing is planned to be focused initially. The Government would welcome comments on any aspect of these proposals.

7.2 The aim of spectrum pricing is to ensure, in the interests of spectrum efficiency and of increasing the economic benefits derived from radio, that users pay an amount for spectrum that more closely matches the value that they or alternative users place upon it. As a result, users will have incentives to relinquish unused or under-utilised spectrum. They will also take the value of the spectrum into account at the time that they make investment decisions, for example on whether to invest in more spectrally efficient technology, to move to a less congested band or to switch to an alternative service or communications medium.

Administrative pricing has limitations ....

7.3 Administrative pricing requires the spectrum manager initially to set an appropriate price level without knowing the true market value of the spectrum. An inappropriate price level will either over-price the spectrum, which could result in bands being left vacant, or be insufficient to balance supply and demand. In either case, there would be an undesirable outcome.

.... but will still be an improvement on current pricing

7.4 However, where auctions are not suitable, administrative pricing, even if at a sub-optimal level, will enable more appropriate economic choices to be made and will bring considerable benefits in spectrum efficiency compared to the present situation in which spectrum is seriously underpriced in many cases.

Charges will reflect value of spectrum ....

7.5 The methodology proposed by NERA/Smith is described in full in their report and is summarised below. It involves calculating the marginal value of the spectrum. The rationale is that the economic value to the user can be assessed on the basis of the additional cost of the least-cost practicable alternative to the present assignment. This is a measure of the worth of the assignment since it reflects the amount that the user would have to pay if deprived of it. If there is no realistic alternative technology or service, marginal value can be assessed on the basis of discounted profits.

7.6 As stated above, auctioning is the Government’s preferred spectrum pricing method. However, it is not well-suited to individual assignments in the services where immediate spectrum pressures are greatest, mobile radio and point to point fixed links. It is envisaged that administrative pricing will be used for these applications, at least initially.

7.7 The following paragraphs indicate the service, technology or frequency band options considered in the study and the least-cost spectrum-efficient alternatives. Prices based on the costs of these should provide a realistic incentive for spectrum to be released for other users and services. Users will be free to continue with their present arrangements or to choose any other option that better suits their individual circumstances and requirements. Under the new regime, their decisions will be informed by prices that better reflect the scarcity value of spectrum so spectrum will be used more efficiently and productively.

7.8 The table below sets out the options for mobile radio. The least cost practicable alternatives used as a basis for administrative pricing are shaded.

Table 7.1
Spectrum choices: mobile radio

7.9 Fixed links users have the alternatives of moving to cable, where available, equipping with lower bandwidth technology, moving to higher frequencies or accepting lower availability for applications where the highest standards of reliability are not essential. For trunk network fixed links between 4 and 15 GHz, the least-cost options are narrower bandwidth equipment or lower availability. Below 2 GHz, links have lower capacity, and hence narrower bandwidths (typically less than 3.5 MHz), congestion is not a problem and there is no present need to increase charges. At these frequencies, fixed links radio costs may already be higher than the costs of cable. There is no present spectrum management need to increase charges above 15 GHz.

7.10 This is not the only approach that could be adopted. A number of alternatives have been suggested in economic literature, such as basing charges on users’ revenue or profitability. However, they all have their limitations. The method proposed in the NERA/Smith study:

· will bring about a significant improvement compared to the present cost-based regime, which provides virtually no incentives for spectrum efficiency;

· fits well with the Government's intention to use pricing to achieve specific spectrum management objectives, such as encouraging users to move to higher frequencies or to adopt more spectrally efficient technology;

· is practicable, as the data needed are available for a wide range of radio uses.

.... but will be kept to lowest level needed and phased in

7.11 The NERA/Smith study makes clear the importance of monitoring market developments and modifying spectrum charges in the light of changes in technology, equipment costs and demand for spectrum. Changes in spectrum allocations also have to be taken into account since, if more spectrum is allocated to a service, that could reduce the need for charges to be increased. Accordingly, the Government proposes that only half the amount of the increases suggested by the study should be implemented and phased in over a 3 year period. At the end of that period, the effectiveness of the policy would be reviewed and the need for further increases considered. Additional increases up to the level indicated by the least cost practicable alternative would be implemented only if necessary for spectrum management reasons.

Pricing will be based on technical factors....

7.12 The NERA/Smith report proposes that administrative pricing should be on the basis of:

Mobile radio

· spectrum used (bandwidth);

· the area sterilised by the transmission and within which re-use of the frequency is not possible; and

· the degree to which the channel can be shared with other users assessed on the basis of the number of mobiles. The number of mobiles is only a rough indicator of actual use and the RA is developing more sophisticated alternatives.

Point to point fixed links

· bandwidth;

· frequency band (charges will be higher in bands between 4 GHz and 15 GHz);

· availability (there will be discounts for lower availability).

Further details and illustrative examples are given in Annex A to this White Paper.

.... and geographical location

7.13Location will also be taken into account. There will be substantial discounts in areas where spectrum pressures are less.

a) Mobile radio

7.14 As recommended by the NERA/Smith study, the Government proposes that spectrum pricing should be focused on London, Birmingham and Manchester (mobile region 1), where spectrum pressures are most intense. Elsewhere (mobile region 2, corresponding to combined categories 2 and 3 of the NERA/Smith study), demand is less, there is no current spectrum management need to increase charges and some reductions may be possible. However, there are parts of mobile region 2 where congestion may become a problem in the future. Spectrum pressures in those areas may rise to an extent that it becomes necessary to increase charges there for operational spectrum management reasons, either to the level in mobile region 1 or to an intermediate level. The need for this will be kept under review, although it is expected that increases will not be necessary in most of mobile region 2.

b) Point to point fixed links

7.15 Congestion is worst in and between the major cities. Hence it is proposed that there should be two charging regions. Spectrum pricing will be focused on fixed region 1, which will comprise links between, or with one end in, Greater London, the West Midlands, Greater Manchester, Tyneside, Liverpool, Glasgow or Leeds. Charges for other links (fixed region 2) would remain at or below current levels as there is no spectrum management need to increase them at present.

There will be no increase in many areas

7.16 Annex A gives illustrative figures for some typical users. Further details of the methodology and the calculation of prices are given in the NERA/Smith spectrum pricing study. In line with the Government's policy of keeping increases to the lowest level consistent with spectrum management objectives, the increases are focused on applications and regions where congestion is most severe. Most of the country and many services will not be subject to any rise in spectrum charges in real terms and may benefit from reductions.

Channel Islands and Isle of Man

7.17

The Government envisages that the spectrum pricing legislation, like the Wireless Telegraphy Act 1949, will extend to the Channel Islands and Isle of Man with any necessary modifications and adaptations.

Spectrum charges should be affordable, including by small firms ....

7.18

Charges at the level proposed should be sustainable by users, including small businesses, and should not have the effect of pricing users out of spectrum. The table below compares spectrum prices at the end of the initial 3 year period against costs and revenues for two typical pbr users at opposite ends of the size scale.

Table 7.2
Comparison of annual spectrum costs, revenues and system costs

7.19 Turning to mobile telephony, the fees payable by the four cellular and PCN operators would, on the basis of the proposals, be around £50m for their current spectrum at the end of the initial 3 year period. By comparison, it has been forecast that they will, by the year 2000, have a combined turnover of over £3.8bn, profits of £1.4bn and 10 million subscribers .

7.20 For fixed links, the main users of high capacity trunked networks are telecommunications operators and utilities, which have large revenues and profits relative to the size of the proposed spectrum charge increases. The impact of spectrum pricing will be further reduced by the discounts that will apply in much of the country.

7.21 The size of the proposed fee increases relative to turnover and radio costs makes it unlikely that business, including small firms, would find them prohibitive. On the contrary, by increasing access to spectrum through greater spectrum efficiency, pricing will enhance access to spectrum for businesses of all sizes.

7.22 Nor does it seem likely, on the basis of the figures in the table, that spectrum pricing on the lines proposed would result in significant increases in the prices charged to radio-using businesses' customers, although the extent to which licence fee increases are passed on will depend on various factors, including competitive pressures.

7.23 The Government intends that pricing policy should be applied flexibly where appropriate. A possible example would be to charge new operators or services at rates that take account of the desirability of promoting efficient competition or the introduction of new technology. In such a case, the Government would expect full spectrum prices to be charged once new market entrants are established.

.... and will benefit business overall

7.24 Overall, the economy and businesses will benefit from spectrum pricing. It is estimated that the additional costs to current radio users will be exceeded by the economic benefits resulting from the greater spectrum efficiency that the charges will promote. It will be possible for more businesses to gain access to spectrum, which will benefit them individually in terms of increased efficiency and turnover. Spectrum will also be available for new services to be introduced more quickly than would otherwise have been possible. The economic impact study quantifies the very substantial amounts (billions of £s) that spectrum shortages can cost the economy in terms of lost business opportunities and delays in introducing new services.

The Government would welcome views on the proposals for administrative pricing outlined in this chapter and, in particular, on the following issues:

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