11 April 2003

Alexandra Tosun and Nina Beynon

Will the new Telecommunications Act introduce a trading system for radio frequencies in Germany?

The introduction of a trading system for radio frequencies is one of the most contentious issues being considered as part of the reform of the German Telecommunications Act. Spectrum trading already exists outside the European Union and thanks to the new Directives it is now being considered across the EU. It is a particularly complex question for UMTS licensees.

The current legal position in Germany

Section 9 of the Telecommunications Act 1996 provides that for a licence to be assigned the Regulatory Authority for Telecommunications and Posts (RegTP) must be notified of such proposed assignment in order to be able to authorise it. Even though licences may be transferred, the right to use frequencies covered by the licence cannot be passed to a third party - because frequencies qualify as scarce resources, if the original licence holder sells its licence or comes under the control of a new shareholder, the right to use any frequencies reverts to the RegTP. Section 9.2 of the Act provides that the licence holder must notify the regulatory authority if there is a change of ownership and this precludes the establishment of a private trading system for frequencies. It also gives the RegTP the opportunity to consider the suitability of the party now in control of the licensee for holding a licence as well as useful information about market developments.

The allocation of licences as well as the allocation of frequencies depends on the personal characteristics of the applicant, such as reliability, capability and expertise. These apply equally to a new applicant or in the case of a change in ownership to the new shareholder. However, competitive independence is not a prerequisite.

Third generation mobile licensees

Thanks to a judgment of the Presidential Chamber of the RegTP on 18th February 2000 concerning the framework for granting UMTS licences, the competitive independence of the new applicant or licence holder became a condition for participation in the German 3G auction and must be guaranteed during the entire period of the licence, until 31st December 2020. This precludes market consolidation through takeovers among the existing licence holders and is intended to promote competition.

Thus 3G is subject to special considerations which do not apply to other radio licences, in that independence, as well as personal characteristics, determine whether a prospective shareholder is suitable. The RegTP will specifically look at the effect on fair and effective competition when considering a prospective 3G shareholder.

Consolidation between 2 or more 3G licensees in a way, which would allow them to pool their frequency assignments, would not be permitted in Germany. It would result in revocation of at least one of the spectrum licences by the RegTP and termination of spectrum usage rights, - without any refund of the licence fee. The only way a 3G licence or licensee can change hands is if purchased by a new owner which is wholly independent from the other five licence holders.

This has already caused problems for several UMTS licensees, who wanted to bring new capital into the company by selling shares or through changing hands outright. The pool of potential purchasers is limited by the rules on consolidation, and very few companies were eligible to participate in the auction in the first place. It is only to the members of this pool, who were not successful in the auction and who can comply with the personal and technical pre-conditions, that licensees can look for new controlling shareholders.

Current market conditions do not make 3G licensees attractive except to other licensees with complementary frequencies and existing network infrastructure. Roll-out must reach 25% of the population by 2003, and this is an additional pressure which means that only companies which are already established within the market will be interested in expanding their existing frequency assignments.

Spectrum trading

According to industry research, the German UMTS market can only support 2 or 3 network operators using their own infrastructure, if costs are to be recovered and a reasonable profit made. Already 2 licensees have halted network development due to insufficient funds, and both are offering to sell their UMTS licenses. As time passes the likelihood of finding a purchaser decreases with the increasing difficulty of satisfying the roll-out obligation. It now looks impossible to meet. A solution would be a frequency trading system, which expressly extends to UMTS licence holders. This is not currently permitted by German law, although it is envisaged in the enabling provisions of the new EU Directive package and the Radio Spectrum Decision of the European Parliament and the Council. According to these, Member States may permit the private assignment of spectrum usage rights in order to promote competition.

A common goal within the EU is harmonisation of spectrum use and so national regulatory authorities are expected to maintain a supervisory role if they do permit spectrum trading and EU rules provide for a notification process for all trades. Specifically, competition rules must be respected.

Comparison with the situation in other countries

Experience in Australia and the US suggests, that spectrum trading accelerates the introduction of innovative services and technologies and that by permitting allocation of frequencies to a third party, which can make better use of the spectrum, efficient usage is maximised. In the US spectrum trading has led to repeal of the limitation on capacity for commercial mobile radio services, the so called "Spectrum Cap Order". Italy, France and Spain have recently declared that they would favour open trading in frequencies amongst UMTS licence holders. The UK is in the process of implementing it.

Starting point for reform by the German legislator

The European legislation is enabling with regard to spectrum trading. It does not impose an obligation on Member States to introduce spectrum trading. If a Member State chooses to do so, it has a wide discretion as to how it should be done. In any event the EU rules are not expected to be implemented in German law by the July 2003 deadline. The Federal Economics Ministry is preparing a ministerial draft bill to implement the EU rules. It has included in the proposed new Telecommunications Act a regulation, which allows for the assignability of frequency usage rights. However this regulation will not be retrospective so its application to current licensees is unclear. This is to avoid challenges from participants in the original 3G auction who were not awarded a licence, although it would be difficult for them to show loss, given the state of the 3G market at present.

Whilst there may be a risk of distorting competition if a trading system is introduced, the risk of individual telecommunication companies disappearing from the UMTS market altogether due to financial difficulties is greater. If this happens frequency assignments will revert to the regulatory authority and would probably be re-allocated to the remaining UMTS licence holders. The largest or most well-funded operators would then divide up the UMTS market amongst themselves, possibly destroying competition altogether and establishing instead a duopoly.

For more information on spectrum trading, please click here.