Annual licence fees for 900 MHz and 1800 MHz: methodology to derive a discount rate consistent with CPI inflation

This document follows our consultation in October 2013 setting out our proposals for revising annual fees payable for licences to use radio spectrum in the 900 MHz and 1800 MHz bands (the October 2013 consultation).

That document set out the choice of inflation index we proposed to adopt for setting annual licence fees.

The purpose of this document is to further consult on the specific issue of the methodology that we propose to adopt if we were to derive the appropriate discount rate for annualising the lump sum values into annual fees on the basis of CPI (instead of RPI), including the size of the wedge (ie. difference) between the forecast rates for the two indices.

If we adopt CPI as the inflation index, we propose to derive the CPI-based real discount rate by deflating the nominal discount rate by CPI inflation. We propose to use the Bank of England's CPI inflation target of 2% as the long-run CPI inflation estimate used in this calculation, together with the Bank of England's estimate for the long-run wedge between CPI and RPI of 1.3%.

We have not taken any decisions yet on any of the proposals set out in the October 2013 consultation, including on the specific issues of: the choice of inflation index (CPI or RPI) to be used to calculate ALF: which discount rate to use; or whether to update other discount rate parameters (aside from the updates that relate specifically to the inflation assumptions). For the avoidance of doubt, this consultation does not cover these issues.