Yemen, 11-13 December 2005 Price-setting process – methods of spectrum assignment Economic aspects...

Yemen, 11-13 December 2005Yemen, 11-13 December 2005

Price-setting process – methods of spectrum

assignment

Economic aspects of spectrum management for Arab States

Director of NIIR Research Centre, Professor of MTUCI,

Dr V. Tikhvinskiy

22

• Definitions • Spectrum Management• Role of Economical Methods in

Spectrum Management• Market & non-market methods use

for frequency assignments• National cost allocation systems • Conclusions


Structure of the presentation

33

Features of Radio Spectrum

1.Spectrum is 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


44

Spectrum market: Supply & Demand

1. The demand 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.


55

Spectrum market situation

● Features of Spectrum resource● Increase in spectrum access

demand ● Rebalance demand and supply of

Spectrum resource● Economic methods for spectrum

management


66

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


77

Spectrum management

• It means “all activities carried out It means “all activities carried out with the aim of giving access to with the aim of giving access to spectrum for the largest possible spectrum for the largest possible group of interested parties, group of interested parties, in due time, while ensuring the overall efficiency of spectrum use and avoiding harmful interference”.

• (ECC Report 016).(ECC Report 016).


88

Definition of Assignment

Frequencydistribution to

French English Spanish

Services Attribution(attribuer)

Allocation(to allocate)

Atribución(atribuir)

Areas or countries

Allotissement(allotir)

Allotment(to allot)

Adjudicación(adjudicar)

Stations Assignation(assigner)

Assignment(to assign)

Asignación(asignar)


Assignment (of a radio frequency or radio frequency channel) is the Authorization given by an Administration for a radio station to use a frequency or frequency channel under specified conditions

Definition of Spectrum PricingSpectrum 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


1010

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?


1111

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 implementation new technologies and services. Economic Methods are mean for an achievements of balance on Spectrum market.

3. 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.


1212

Place of economics of spectrum

Efficient use of spectrum

Assignment of spectrum rights within a particular

frequency band

Allocation of spectrumto categories of use


1313

Level of Spectrum Pricing Impact

• International ( RR International ( RR Table of Table of Frequency Allocations)Frequency Allocations) – – NoNo

• Regional (Europe -ECA , Asia, Regional (Europe -ECA , Asia, Africa, etc.) – Africa, etc.) – NoNo

• National - National - YesYes


1414

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.


1515

Spectrum assignment methods

3 methods use for frequency assignments after spectrum allocated to a particular use.

Non-market based approaches:

1.Comparative process( Beauty Contest/Tender);

2.LoterryMarket based approaches:

3. Auction


1616

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.


1717

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.


1818

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.


1919

Lottery

Method for spectrum assigning licenses or spectrum rights to licenses or spectrum rights to applicants selected at random.applicants selected at random.


2020

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.

2121

Type of Auctions

Auction

Englishauction

First-price sealed

bid auction

Second-pricesealed

bid auction Dutch

auction

Simultaneousmultipleround

auction


Source: ITU Report SM 2012

2222

GSM & UMTS Spectrum Licensing


Instruments used for assignment of GSM & UMTS spectrum

UMTS

8

8

2Action

Beauty contest

Action & Beautycontest

GSM 900 & 1800 MHz

4

12

2Action

Beauty contest


Source: ECC Report 65

2323

Assignment of FWA / WLL Spectrum


Results assignment of FWA/WLL spectrum by different methods

FWA / WLL

5

8

21 Action

Beauty contest


Notification+radiolicence

2424

Broadcasting TV & Analog radio


Instruments used for assignment of broadcasting spectrum

Analog radio

1

4

1Action

Beauty contest


Digital TV

0

7

1Action

Beauty contest

Call fo tender, freespectrum


2525

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.


2626

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.



2727

Methods of Licence fees determination

• Fees based on spectrum management costs (Direct & Indirect);

• Fees based on users’ gross income;

• Incentive fees;• Opportunity cost fees.



2828

Form of Administrative pricing

Administrativespectrum

pricing

Shadowpricing

Incentive pricing

Regulatory Pricing



2929

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.


3030

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).


3131

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.


3232

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.


3333

Differentiation of Spectrum Pricing

The following technical and economic criteria are used The following technical and economic criteria are used to define and differentiate spectrum fees:to define and differentiate spectrum fees:

• Type of radio service and purpose of spectrum useType of radio service and purpose of spectrum use• Type of operator (public/private)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.


3434

• 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

Result of EC Investigation



3535

Models foundation of SMO

Five main 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


3636

Cost-accounting/ cost-allocation system

• A cost-accounting or cost-allocation A cost-accounting or cost-allocation system is a model that clarifies the costs system is a model that clarifies the costs of the SMO for a certain type of activity of the SMO for a certain type of activity or certain group of licence holders.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.


3737

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).


3838

1- Fee-based model ‘Policy’

“Money”

“money” (in case of a surplus) “bill”

Spectrum Management Organisation (SMO)

State budget/Ministry Licence-

holders

reflects the ‘value’ of the spectrum (incentive pricing)

e.g. UK



3939

2- State-financed model

money ‘policy’

money (‘budget’)

(internal) cost-accounting system “bill”


State budget/ ministry Licence-

holders

reflects all kind of policy, economic or societal considerations

e.g. Denmark, France, Czech Rep.

Malta, Poland



4040

3- Charge-based model with cost-allocation

‘money’

“policy”

“bill”


General budget/ministry

Licence-holders

reflects the costs of the SMO

cost-allocation system

e.g. Netherlands, Sweden



4141

4- Charge-based model without cost-allocation

“policy” ‘Money’

“bill”


State budget/ministry Licence-

holders

reflects the total costs of the SMO

based on various general methods (e.g. international benchmarking)

e.g. Bulgaria, Hungary,Finland, Turkey


4242

5 a - Hybrid fee & charge-based model ‘money’ (Total bill: (fee + charge))

‘Policy’

money to cover “bill” costs of ‘SMO’ (=charge part of bill)


State budget/ministry Licence-holders

Total bill consists of two components: ‘Charge’ (reflects the

costs of the SMO) and a ‘Fee’ for the use of

spectrum

Charge may be based on: cost-allocation system various general

methods (e.g. international benchmarking)

Fee based on: general tax type of use or ‘value’ of the

spectrum (incentive pricing)

‘Fee’ part is kept by the state budget.

e.g. Switzerland,Estonia

4343

5 b - Hybrid fee & charge-based model

“policy” ‘money’ (total bill) to SMO

Total ‘Fee’or ‘Total bill’

fee surplus


State budget/Ministry Licence-holders

Total bill consists of two components: ‘Charge’ (reflects the

costs of the SMO) and a ‘Fee’ for the use of

spectrum

Charge may be based on: cost-allocation system various general

methods (e.g. international benchmarking)

Fee may be based on: general tax type of use or ‘value’ of the

spectrum (incentive pricing)

‘Charge’ part is kept by the SMO

e.g. Croatia, PortugalIreland, Latvia

4444

Aims of Spectrum fees

Policy objectives pursued:• Equal treatment• Proportionality• Competition• Optimum spectrum use• Society needs• Transparency• Legal certainty


4545

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


4646

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


4747

Enhancement of SMO

Other developments:• Auctions vs. spectrum fees• Charges/Fees and outsourcing• Flexible regulatory framework• Licence exemption• Technological developments


4848

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


4949

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


5050

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.


THANKS FOR YOUR ATTENTION

www.niir.ru/struct/c4.html

teltel.+7 095 267-8430.+7 095 267-8430

[email protected]@niir.ru


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