The Communications Act 2003 requires regulations to be introduced facilitating trading in spectrum which, in turn, was required by the EC Framework Directive 2002/21. Ofcom’s consultation period has recently closed and its response to the consultation and confirmation or amendments of its proposals are awaited. The consultation document of November 2003 itself contained specific, single proposals on each relevant issue and therefore reflects relatively well-developed thinking on the part of the regulator.

The underlying principles of Ofcom’s proposals are expressly intended to be consistent with its duties under the Communications Act, including the objectives of:

  • the optimal use of the electro-magnetic spectrum for wireless telegraphy

  • the availability of a wide-range of electronic communication services, and the encouragement of investment and innovation

  • the promotion of competition in relevant markets

  • the different needs and interests of all persons who may wish to make use of the electro-magnetic spectrum

  • the need for transparent, accountable, proportionate and consistent regulation, targeted only where action is needed

The introduction of spectrum trading first requires a redefinition of the nature and scope of spectrum licences under the Wireless Telegraphy Act (“WTA”), in order to make them more akin to tradable assets. The proposed reforms include:

  • defining transmission rights more flexibly in terms of emission levels at the geographical and/or frequency boundaries of licences

  • allowing reconfiguration and changes of use of WTA licences, in accordance with guidance to be published by Ofcom on the extent of reconfiguration and change of use that will be permissible for each licence class

  • publishing guidance levels of interference for each licence class and a mechanism for dealing with any undue interference (that could result from changes of use)

  • defining the duration of WTA licences as terminable by Ofcom on a notice period of five years

Trading Regulations to be adopted by Ofcom

Any transfers of spectrum which fail to comply with the new regulations to be adopted by Ofcom will generally be void, under the Communications Act. Ofcom is authorised under these regulations to:

  • authorise partial as well as outright transfers of rights and obligations

  • restrict the circumstances and the manner in which a transfer may be made

  • require the prior approval or consent of Ofcom for a transfer (possibly subject to making the required payment in respect of the approval or consent)

  • provide for a transfer to be effected by the surrender of a licence and the grant of a new one in respect of the transfer

  • require compliance with specified pre-conditions to be imposed by Ofcom

All participants in the spectrum trading, both direct users and intermediaries such as brokers, market-makers and spectrum management organisations would be required to comply with Ofcom’s Trading Regulations. Ofcom would record and register changes of ownership of spectrum rights by modifying its register of spectrum assignments, at the request of the parties and upon receiving appropriate evidence of the transfer, and in the absence of any transgression of the Trading Regulations.

Proposed format of spectrum trading

The proposed methodology of a transfer of a WTA licence will in most circumstances involve a surrender by the licensee of its existing licence and a re-issuing by Ofcom of the appropriate new licence or licences. The right to transfer rights and obligations under WTA licences will therefore generally be granted by means of the regulations to be adopted by Ofcom under the Communications Act, rather than by means of amendment to existing WTA licences.

In order to confirm the character of tradable assets upon WTA licences, Ofcom is proposing that WTA licences should define the right to transmit in terms of transmitted power or equivalent isotopically radiated power (“eirp”) and a “spectrum mask”, with the right to transmit also being further specified in terms of conditions experienced at a defined geographic and/or frequency boundary. These conditions should be broad enough to be technology-neutral, but sufficiently tightly defined that geographic boundaries could be managed effectively.

As a result of this approach, licensees would be able to reconfigure their rights by sub-dividing them so as to retain specific rights to use spectrum whilst transferring others relating to a particular sub-band or geographical area, within the overall scope of the original licence. In this way, licence holders will have the flexibility to redefine and customise their spectrum assignments in the optimal manner through trading.

The same approach would be taken in relation to initial assignments of spectrum, i.e. the introduction of new spectrum onto the market. Such new WTA licences would refer to the entire assignment of spectrum and will specify the initial use of the spectrum, thus enabling parties to sub-divide licences through any subsequent trading. Ofcom states that in a market-based, i.e. trading-orientated, system of spectrum management, it will continue to be important to ensure fair, objective, non-discriminatory, transparent and competitive processes for the introduction of new spectrum to commercial users. Accordingly, where only a limited number of licences can be granted in a particular band and where there is excess demand for the available spectrum, auctions will continue to be the primary method of assigning spectrum licences, at least where significant new blocks of spectrum are concerned. For smaller blocks, such as new spectrum for private business radio systems, they could be advertised and offers brought on a single round basis, in order to save the costs associated with auctions.

Changes of use

A vital aspect of making spectrum tradable is the liberalisation of use of spectrum. This, it is proposed, will be made possible by enabling Ofcom to consider and grant requests on a case by case basis, for reconfiguration and changes of use where appropriate, so as to enable licence holders to seek higher value economic uses from their spectrum. Since WTA licences are at present restricted to services and technologies determined by the regulator at the time the licence is granted, it would not be possible to transfer trading rights between operators in different service sectors, without this reform. Change of use of licences could in future be contemplated in different ways, as follows:

  • where there is a change of the licensee’s line of business, for example, a private business radio licence which in future is to be used by a courier company instead of a taxi company

  • a change of technology where, for example, the licensee wishes to use a new radio technology with a different modulation to provide the same radio service

  • a change of application where, for example, the licensee wishes to use the spectrum by providing a fixed wireless service in place of a mobile service.

It is in turn a key requirement of allowing change of use, that Ofcom ensures that high quality interference management is maintained, due to the risk of spectrum congestion. It is vital that permitting changes of use does not result in an “interference free-for-all”. Ofcom proposes that although it will evaluate changes of use requests, ultimate responsibility for avoidance of undue interference will remain with the licence holder. Although Ofcom will endeavour to refuse approvals where technical assessments are demonstrably inaccurate, the party holding or requiring the WTA licence will need to satisfy itself of the accuracy of its assessment of the interference implications of its proposed change of use. Licensees who propose to reconfigure or change the use of their licences will have to provide Ofcom with a report demonstrating that the new use will not result in interference to other users above the levels of interference to be laid down in the Ofcom guidelines. Where the emission levels exceed the guideline levels, Ofcom will generally require the licensee to alter its transmissions and may seek to vary the terms of the licence accordingly.

There are further specific policy considerations with regard to changes of use in connection with spectrum trading. For example, with regard to the 3G mobile use of spectrum, Ofcom states that it will not expect to allow other bands not presently designated for 3G to change their use to offer 3G services until the end of the transition to full liberalisation and tradability in 2007. In this way, Ofcom intends to take account of the large scale and significant risks of licensees’ existing 3G investment programmes. Ofcom also indicates that the introduction of tradability and liberalisation of spectrum use may also be delayed in relation to other licence classes where immediate liberalisation could hinder other spectrum management policies or other general policy objectives. These include a) broadcasting spectrum, where decisions regarding the future of frequency planning for digital switchover are awaited and b) emergency services spectrum, which is already undergoing rationalisation.

3G roll-out obligations

Ofcom’s proposals specifically address licence conditions which are not directly related to the use of spectrum but which are intended to address spectrum efficiency, public policy and competition matters. The key example of these is roll-out conditions in 3G WTA licences. Fulfilment of such conditions would need to be maintained in the event of any trading in the relevant spectrum Ofcom also indicates that it may continue to include obligations, such as the roll out requirements, in future primary assignments of spectrum.

Ofcom indicates that where spectrum is transferred which is subject to obligations which do not directly define the right to use the spectrum, such as roll out commitments, such obligations would not need to be transferred in all cases. Ofcom may permit the transfer of rights to use spectrum free from associated roll out obligations where it is satisfied that a licensee could continue to meet such obligations without using the entire spectrum assigned to it, or by exchanging spectrum with another party. A licensee who retains such obligations for itself will have to ensure that it retains enough appropriate spectrum to fulfil those obligations. Where the obligations are passed on with an assignment of spectrum, it will be necessary for the new owner to have the appropriate financial, technical and spectrum resources to meet the obligations. In either case, Ofcom would need to verify that the proposed holder of the obligations could continue to meet them. If fulfilment of the obligations were threatened, Ofcom would have the power to prevent the trade.

Spectrum pricing

Ofcom’s proposals concerning the pricing of spectrum are intended to incentivise the actual use of the spectrum, so as to prevent anti-competitive spectrum hoarding. Such pricing methodology would reflect the opportunity costs of holding spectrum, assessed by comparison with the least cost alternative technology at the margin. This is known as “administrative incentive pricing” and would be applied to all WTA licences, except as regards auctioned spectrum (where the pricing arrangements were determined under the terms of the auction). Based on this approach to pricing, Ofcom proposes that no express obligation to use the relevant spectrum should be imposed on WTA licensees, i.e. that licensees should not be subjected to “use it or lose it” requirements. However, there are disadvantages with administrative incentive pricing, in that it is expensive to administer as it requires regular reviews, and it is also difficult to determine the true opportunity cost of spectrum use, being based on a theoretical estimate of the value of spectrum.

Ofcom believes that once spectrum trading is well established, it may dispense with administrative incentive pricing, but believes that, at least initially, administrative incentive pricing and spectrum trading should be used in parallel. In order to provide a degree of certainty to purchasers of rights to use spectrum as to the future level of fees relating to that spectrum, the timescale of future reviews of administrative incentive pricing will be stipulated in advance and they are likely to be every five years. Ofcom proposes to achieve a further degree of certainty by providing that it would not carry out a one-off reassessment of pricing upon a change of use, where this occurs between scheduled reviews. Rather, administrative incentive prices would be fixed for particular blocks of spectrum for the duration of the pricing review period irrespective of the change of use during that period.

Competition issues concerning acquisitions of spectrum

Ofcom’s consultation paper specifically addresses competition considerations of the acquisition of market power concerning spectrum, both in the market for a particular type of spectrum, and in a related downstream market, for example, mobile telephony to which spectrum is an input. Such market power could then be used to distort competition in the following ways:

  • companies might limit competition in downstream markets by purchasing spectrum and then preventing competitors from accessing it

  • companies may obtain control of a large proportion of the spectrum necessary for a particular service and then seek to prevent competition in related markets by requiring customers to purchase access to the spectrum along with another product (such as transmission equipment)

  • intermediaries such as spectrum management organisations may be able to charge excessive prices for access to spectrum that they control

The consultation paper indicates, however, that it may be very difficult to identify excessive pricing practices of spectrum, as there are no inherent costs of holding spectrum, apart from the proposed administrative incentive prices. Further, it may be very difficult to distinguish between commercial uses of spectrum and anti-competitive hoarding of spectrum, due to the complexity of identifying inefficient technical use of spectrum (either generally or with reference to specific frequencies).

Since the provisions in the Competition Act 1998 on abuse of dominant position only apply where a dominant position has already been acquired, Ofcom proposes to address the acquisition of market power as well as the abuse of dominance. However, the merger control rules in the Enterprise Act 2002 will not themselves be sufficient in all cases to deal with the acquisition of market power in spectrum. This is because these merger control rules are based on the concept of mergers of “enterprises”, but the relevant Office of Fair Trading guidelines indicate that intangible assets can normally only constitute an “enterprise” where it is possible to identify turnover directly related to the transferred intangible assets that will also transfer to the buyer. Some types of spectrum could constitute an enterprise, in particular, where a positive obligation to supply such as a roll out obligation, is sold along with the spectrum, or where revenues are otherwise attached to the spectrum. However, any transfer of spectrum which does not have any revenue stream attached to it is unlikely to constitute a merger of enterprises and therefore is unlikely to fall under the merger control provisions of the Enterprise Act.

Ofcom states that it does not propose to introduce specific limits on the amount of spectrum which can be held by an operator (so-called “spectrum caps”) since these fail to address the specific issue of the level of market power. However, Ofcom states that in view of the concerns regarding the Competition Act and Enterprise Act in this context, it is important to address the issue of market power through acquisition of rights through spectrum, by means of specific rules based on the concept of a substantial lessening of competition in relation to spectrum. These rules will be designed to address the potential competition concerns and will include the definition of the relevant markets and the assessment of actual and prospective market power (using a share of supply test similar to that in the Enterprise Act 2002) as well as the appropriateness of potential remedies.

Accordingly, Ofcom states that once the present general consultation of spectrum trading has been completed, Ofcom will consult separately on the substantive assessment and procedures which it proposes to apply in assessing competition issues in relation to spectrum trading.

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