Price-setting process – methods of spectrum assignment

1. BDT Economic aspects of spectrum management for Arab States Price-setting process – methods of spectrum assignment Director of NIIR Research Centre, Professor of MTUCI, Dr V. Tikhvinskiy Yemen, 11-13 December 2005

2. BDT Economic aspects of spectrum management for Arab States Structure of the presentation • Definitions • Spectrum Management • Role of Economical Methods in Spectrum Management • Market & non-market methods use for frequency assignments • National cost allocation systems • Conclusions

3. BDT Economic aspects of spectrum management for Arab States Features of Radio Spectrum 1.Spectrumis a finite and scarce resource. 2. Spectrum is an intangible resource freely available to society. 3. Spectrum is owned by the state (it is a public resource (asset)) and leased under various terms to users

4. BDT Economic aspects of spectrum management for Arab States Spectrum market: Supply & Demand 1.Thedemand for spectrum in certain bands has grown markedly and more often demand is greater than available supply . 2.The demand for spectrum increases as the price of spectrum falls. 3.Unlike in most markets, spectrum prices are determined via an administered process.

5. BDT Economic aspects of spectrum management for Arab States Spectrum market situation • Features of Spectrum resource • Increase in spectrum access demand • Rebalance demand and supply of Spectrum resource • Economic methods for spectrum management

6. BDT Economic aspects of spectrum management for Arab States Balance on the Spectrum market 1.One of the aims of administered spectrum pricing is to ensure that supply and demand for spectrum are balanced. 2. Balance on the Spectrum market can be achieved by price-setting methods implementation for Spectrum Management

7. BDT Economic aspects of spectrum management for Arab States Spectrum management • It means “all activities carried out with the aim of giving access to spectrum for the largest possible group of interested parties, in due time, while ensuring the overall efficiency of spectrum use and avoiding harmful interference”. • (ECC Report 016).

8. BDT Economic aspects of spectrum management for Arab States Definition of Assignment Assignment (of a radio frequency or radio frequency channel) is   the Authorization given by an Administration for a radiostation to use a frequency or frequency channel under specified conditions

9. BDT Economic aspects of spectrum management for Arab States Definition of Spectrum Pricing Spectrum pricing A generic term denoting the use of pricing as a spectrum management tool. It covers both administrative incentive pricing and auctions of either apparatus licences or spectrum rights. Under spectrum pricing, charges are not set by reference to the fully allocated costs of spectrum management attributable to particular user categories but are intended to balance supply of and demand for spectrum or to achieve other spectrum management policy objectives, such as facilitating the introduction of new services or promoting competition. Source: ERC REP 53

10. BDT Economic aspects of spectrum management for Arab States Aim of Economic Methods of Spectrum Management What are the objectives of countries authorities: keep the cost of access to spectrum as low as possible or maximize the economic benefit derived from spectrum use?

11. BDT Economic aspects of spectrum management for Arab States Role of Economic Methods in Spectrum Management 1.The total supply of spectrum is fixed, but new technologies are affected by the limitations to which they can be utilized. 2.The demand for spectrum is derived from the demand for the implementationnew technologies and services. Economic Methods are mean for an achievements of balance on Spectrum market. 3. The relationship between the demand for spectrum and its own price also reflects users' willingness to pay for spectrum. 4. The objective of spectrum pricing to encourage the introduction new technologies and an efficient spectrum management.

12. BDT Economic aspects of spectrum management for Arab States Place of economics of spectrum

13. BDT Economic aspects of spectrum management for Arab States Level of Spectrum Pricing Impact • International ( RR Table of Frequency Allocations) – No • Regional (Europe -ECA , Asia, Africa, etc.) – No • National - Yes

14. BDT Economic aspects of spectrum management for Arab States Access to Spectrum 1.Access to frequencies is managed by Government, either directly or through Agencies. 2. Access to a few frequency ranges is subject to light regulation (such as license exempt frequencies). 3. Access to most frequency ranges, however, is closely regulated and in some cases frequencies are assigned to specific users on an exclusive basis.

15. BDT Economic aspects of spectrum management for Arab States Spectrum assignment methods 3 methods use for frequency assignments after spectrum allocated to a particular use. Non-market based approaches: 1.Comparative process( BeautyContest/Tender); 2.Loterry Market based approaches: 3. Auction

16. BDT Economic aspects of spectrum management for Arab States Comparative process Comparative process( Beauty Contest/Tender) is method for spectrum assigning, when the qualifications of each of the competing spectrum applicants are formally compared based on established and national criteria. The authority determines who is the best qualified applicant to use the spectrum and awards the license.

17. BDT Economic aspects of spectrum management for Arab States Beauty Contest A comparative selection mechanism that gives weight to criteria other than ‘financial bids’ in order to decide which offer(s) is (are) best. Financial transfers nevertheless can play a role in this decision making process, but only and solely as (ex ante determined) fixed criteria that have to be met.

18. BDT Economic aspects of spectrum management for Arab States Tender A selection mechanism that gives weight to both financial and non-financial criteria in order to decide which offer(s) is (are) the best’. A tender looks like a ‘mixture’ of a beauty contest and an auction.

19. BDT Economic aspects of spectrum management for Arab States Lottery Method for spectrum assigning licenses or spectrum rights to applicants selected at random.

20. BDT Economic aspects of spectrum management for Arab States Auction 1.Licenses are awarded by bidding among competing spectrum applicants. 2. Auction award to those who value them most highly while simultaneously Auctions represent a new form of licence mechanism where the applicants determine the spectrum value to be charged.

21. BDT Economic aspects of spectrum management for Arab States Type of Auctions Source: ITU Report SM 2012

22. BDT Economic aspects of spectrum management for Arab States GSM & UMTS Spectrum Licensing Instruments used for assignment of GSM & UMTS spectrum Source: ECC Report 65

23. BDT Economic aspects of spectrum management for Arab States Assignment of FWA / WLL Spectrum Results assignment of FWA/WLL spectrum by different methods

24. BDT Economic aspects of spectrum management for Arab States Broadcasting TV & Analog radio Instruments used for assignment of broadcasting spectrum Source: ECC Report 65

25. BDT Economic aspects of spectrum management for Arab States Licence fees Licence fees represent another way to frequency assignments. Licence fees range in complexity from a simple table by service, to charge per frequency per station for each service, to complex formulas involving a number of variables.

26. BDT Economic aspects of spectrum management for Arab States Principles of Licence fees • Fees should be take into consideration the value of the spectrum; • Fee mechanisms should be easy to understand and implement; • Decisions and changes related to fee collection should be undertaken with users and industry; • Fee should not be a barrier to entry of innovation and use of new radio technologies, or to competition; • Fee should support the attainment of the spectrum manager’s national goals and objectives. Source: ITU Report SM 2012

27. BDT Economic aspects of spectrum management for Arab States Methods of Licence fees determination • Fees based on spectrum management costs (Direct & Indirect); • Fees based on users’ gross income; • Incentive fees; • Opportunity cost fees. Source: ITU Report SM 2012

28. BDT Economic aspects of spectrum management for Arab States Form of Administrative pricing Source: ITU Report SM 2012

29. BDT Economic aspects of spectrum management for Arab States Shadow pricing A form of administrative pricing in which the price is set according to a predetermined formula intended to simulate the effect of market forces by taking spectrum consumption, value and scarcity into account. Parameters commonly used include bandwidth, frequency location, geographical location and coverage area.

30. BDT Economic aspects of spectrum management for Arab States Administered Incentive pricing (AIP) AIP –method used to set a fee, • are prices charged to license holder (holder of recognized spectrum access (RSA)); • are intended to reflect the opportunity cost of spectrum use (provide effective incentives for efficient use of spectrum).

31. BDT Economic aspects of spectrum management for Arab States Opportunity cost of spectrum The opportunity cost of spectrum represents the benefits that would bederived from the next best alternative use. In other words, the opportunity cost represents the benefits foregone from assigning spectrum to the bestuse instead of the next best use.

32. BDT Economic aspects of spectrum management for Arab States Regulatory pricing Cost-based pricing method. It is charges to license holder (holders of RSA); is set unrelated to market consideration; is intended to recover the regulator's administrative costsincurred in spectrum management, control and enforcement.

33. BDT Economic aspects of spectrum management for Arab States Differentiation of Spectrum Pricing The following technical and economic criteria are used to define and differentiate spectrum fees: • Type of radio service and purpose of spectrum use • Type of operator (public/private) • Frequency band or sub-band • Shared use or exclusive use • Amount of spectrum (bandwidth) used • Coverage area • Network parameter • “Starting” parameter (parameter value increases over time) Technical parameter such as EIRP, power • Operating mode • Percentage of the turnover/profit of an undertaking • Level of frequency re-use.

34. BDT Economic aspects of spectrum management for Arab States Result of EC Investigation • 20 Responses to questionnaire • Provide understanding of national systems but variety of scenarios • Charges/fees often mixed up –Definitions • Relationship costs & charges/fees not always clear Identification of models Source: ECC Report 53

35. BDT Economic aspects of spectrum management for Arab States Models foundation of SMO Fivemain models foundation of Spectrum management organization identified Elements of foundation model: • SMO: Spectrum management organisation (planning, coordination, licensing, enforcement…) • Ministry: overall spectrum policy • Licence holders • Money flows

36. BDT Economic aspects of spectrum management for Arab States Cost-accounting/ cost-allocation system • A cost-accounting or cost-allocation system is a model that clarifies the costs of the SMO for a certain type of activity or certain group of licence holders. • Ideally the charge that is passed to the license holders can be clarified or explained by the cost-accounting/allocation system.

37. BDT Economic aspects of spectrum management for Arab States Fees and charges of SMO • The ‘bill’ that is sent to the market (or to the Licence holders) may have three forms and reflect: • - the costs of the SMO (‘charge’) • - the value of the spectrum or other policy considerations (independent of the costs, i.e. a ‘fee’) • - both the costs of the SMO and the value of spectrum (i.e. a charge combined with a ‘fee’ component).

38. BDT Economic aspects of spectrum management for Arab States 1- Fee-based model e.g. UK Source: ECC Report 53

39. BDT Economic aspects of spectrum management for Arab States 2- State-financed model e.g. Denmark, France, Czech Rep. Malta, Poland Source: ECC Report 53

40. BDT Economic aspects of spectrum management for Arab States 3- Charge-based model with cost-allocation e.g. Netherlands, Sweden Source: ECC Report 53

41. BDT Economic aspects of spectrum management for Arab States 4- Charge-based model without cost-allocation e.g. Bulgaria, Hungary, Finland, Turkey

42. 5 a - Hybrid fee & charge-based model e.g. Switzerland, Estonia

43. 5 b - Hybrid fee & charge-based model e.g. Croatia, Portugal Ireland, Latvia

44. BDT Economic aspects of spectrum management for Arab States Aims of Spectrum fees Policy objectives pursued: • Equal treatment • Proportionality • Competition • Optimum spectrum use • Society needs • Transparency • Legal certainty

45. BDT Economic aspects of spectrum management for Arab States Use of cost-allocation systems Formally used only in few NRAs to determine charges Specific elements • Indirect costs • Direct costs • Cost-recovery principles Pros and cons of using cost allocation systems

46. BDT Economic aspects of spectrum management for Arab States Direct & Indirect costs Indirect costs • Not easy to link to work carried out and therefore to charge • Specific overheads allocated to activities that generate them (e.g. training, salary etc.); general overheads allocated depending on number of staff (e.g. rent) • International work charged to customer group or individual licensee; flat rate may be used. Direct costs • Allocated to individual licensees or groups of licensees • Registration of time spent on various tasks

47. BDT Economic aspects of spectrum management for Arab States Enhancement of SMO Other developments: • Auctions vs. spectrum fees • Charges/Fees and outsourcing • Flexible regulatory framework • Licence exemption • Technological developments

48. BDT Economic aspects of spectrum management for Arab States EU package & administrative charges Expected changes: • More financing via fees & charges • Revision of charges to link them to frequency management costs • Increase in charges • More discipline with budget • Refining of existing cost-allocation Other NRAs already compliant

49. BDT Economic aspects of spectrum management for Arab States EU package & spectrum fees • A number of NRAs already apply spectrum fees • 2 NRAs plan to introduce spectrum fees • 1 does not foresee implementing spectrum fees

50. BDT Economic aspects of spectrum management for Arab States Conclusions • There are many price-setting methods for frequency assignment. • Dual nature prise-setting methods is defined by goal of Administrations. • Five main models of cost-allocation system are using by European Administrations. • European cost-allocation system shift towards more transparent funding models.