Ofcom has progressed swiftly with its proposals to liberalise permitted spectrum usage under Wireless Telegraphy Act licences and to enable trading of spectrum rights, since its initial consultation document of November 2003. Trading of spectrum rights is now made possible as from 23 December 2004 by the Wireless Telegraphy (Spectrum Trading) Regulations, SI 2004/3154, in respect of public mobile operations (data), private business radio, fixed wireless access, point to point fixed links and scanning telemetry. Separate Regulations are now in force establishing the Wireless Telegraphy Register as of the same date (SI 2004/3155).
There has been a steady flow of statements and consultation papers from Ofcom on spectrum trading and liberalisation since August 2004, when it issued a spectrum trading consultation. On spectrum liberalisation, it issued a consultation document in September 2004, its Spectrum Framework Review in November 2004 and a related Implementation Plan on 13 January 2005, and most recently a Statement on Spectrum Liberalisation issued on 26 January 2005. The latest Statement confirms Ofcom’s conclusions and plans to proceed with liberalisation, in two main ways. The first involves varying individual Wireless Telegraphy Act licences to reduce or remove restrictions and the second involves generic changes to licences to make them less usage and technology specific. Ofcom plans to commence the individual variation approach in early 2005 and to introduce generic flexibility late in 2005. Ofcom’s 2005 liberalisation programme focuses on making early progress in the business radio, fixed wireless access and fixed links, as priority spectrum markets.
The proposals for spectrum liberalisation overall contain many positives, but certain aspects, including an apparent desire on the part of Ofcom to withdraw from technical harmonisation matters and to reduce its involvement in dispute resolution, could have a destabilising effect on the sector. This could, in turn, carry the risk of undermining the business confidence needed to make the investments necessary for wide scale roll out and the affordable provision of spectrum-based new services and equipment.
Ofcom’s proposals will create the potential for greater market activity, in particular by freeing up access to spectrum so that operators who can identify a commercial spectrum-based opportunity will have the ability to obtain rights to use the relevant spectrum and hopefully to utilise it to greater value than its current use. In particular, the public sector makes uneconomic use of certain parts of the spectrum and the Treasury is understood to have commissioned an audit of certain public sector uses of spectrum in order to find new ways of ensuring that it can be freed up where possible to enable private sector operators to fulfil their spectrum plans. The ability to trade the spectrum rights and the liberalisation of spectrum, in particular through the right to change the use of spectrum under Wireless Telegraphy Act licences, will contribute to facilitating an improved allocation of spectrum rights following this audit review.
On the other side of the equation, there is a concern that the spectrum market may turn out to be illiquid for a considerable period of time as uncertainty prevails over the true value of spectrum. The return which can be achieved from any particular spectrum will vary considerably between different operators and their different plans. It is not clear whether Ofcom’s planned system of administered incentive pricing (an opportunity cost-based fees system for the right to hold spectrum) will be a reliable indicator of its value. The results of spectrum auctions held during 2004 by Ofcom, in particular for 3.4, 10 and 28 GHz brands demonstrated only limited demand for the spectrum in most areas. Therefore, the success or otherwise of Ofcom’s liberalisation and trading programme depends to a large extent on the expectations and confidence of investors.
This will, in turn, be affected by the overall legal and regulatory environment in which liberalisation is facilitated. First, it is a concern that Ofcom’s apparent desire to withdraw from technical harmonisation, in the supposed interest of technological neutrality, will undermine business and finance initiatives to implement new applications in a way that will provide wide-scale benefits to consumers. Second, Ofcom appears to intend to scale back its involvement in enforcement of spectrum obligations. Third, the liberalisation process seems, despite planned internal safeguards, to undermine the investments made by 3G operators and to carry the risk of discrimination against existing 3G operators as regards the terms of entry into the 3G market.
The need for technical harmonisation
Ofcom’s Spectrum Vision as set out in its November 2004 Spectrum Framework Review stated that:
spectrum should be free of technology and usage constraints as far as possible
it should simple and transparent for licence holders to change the ownership and use of spectrum, and rights of spectrum users should be clearly defined (and should not be subject to change without good cause)
The stated effect is that, in the medium to long term, Ofcom increasingly withdraws from managing the radio spectrum. Ofcom’s November 2004 Spectrum Framework Review indicates the intention of Ofcom to withdraw from harmonisation activities and to allow spectrum to be made available for any application, whether fixed, mobile, broadcast or any convergence of these. This would be without any technological constrains except only to the extent necessary to avoid interference to other users of the relevant band. Ofcom’s January 2005 Statement simply asserts that liberalisation does not preclude standardisation or harmonisation, and either way will be market-driven. However, Ofcom’s desire to leave technical harmonisation to market forces may result in a “chicken and egg” problem whereby operators will be unwilling to invest in spectrum until the necessary equipment is available, which manufacturers may in turn be unwilling to produce until users have necessarily harmonised the spectrum rights. The lack of centralised harmonisation may exacerbate this.
At present, a Wireless Telegraphy Act licence specifies the frequency band and the operating standard. Regulation and harmonisation of network operations, technical standards and functionality are, many would argue, necessary in order to facilitate interoperability and competition in spectrum-based services. That is to say, co-ordinated planning between industry and the national regulators is needed, in order to develop spectrum uses for particular applications of frequencies. Otherwise, there is a risk that the holders of proprietary technology for new mobile applications will be able to dominate the market without the best or most cost-effective technology necessarily prevailing. Indeed, some commentators have identified a risk that high data-rate service provision projects may be stalled due to risks that investors consider unacceptable. Thus, Ofcom’s apparent disinterest in technical harmonisation issues may undermine interoperability objectives and, therefore, inhibit the economic and societal benefits that could otherwise be achievable from its spectrum trading and the liberalisation programme.
Further, the EC Electronic Communications Directives of 2002 contain various provisions requiring Member States to encourage technical harmonisation of use of relevant standards. For example, the Framework Directive 2002/21 requires Member States to work towards harmonised use of radio frequencies (Article 9(2)) and requires Member States, to the extent necessary to ensure interoperability of services and to increase freedom of choice, to encourage the use of standards and/or specifications drawn up by European standards organisations (or in their absence, international standards promoted by the ITU/ISA or IEC) (Article 17). Further, the Authorisation Directive 2002/20 allows the imposition of regulatory conditions for use of radio frequencies, designating the type of networks or technology to be used and also the technical and operational conditions necessary to avoid harmful interference. Ofcom’s desire, shown in its Spectrum Framework Review, to withdraw from harmonisation conflicts with these EC objectives.
The EC Directives support the view that, contrary to Ofcom’s apparent contentions, it is not an appropriate aim and may even be impossible, to implement a purely technology-neutral spectrum implementation plan. Any plan for implementation of usage of a spectrum band should be based on the underlying requirements of specific technologies, albeit that it should not exclude other technologies where interference will not result. This, in turn, requires the development of market-led standards in order to achieve a multi-operator environment reflecting the more wide-scale exploitation of spectrum which Ofcom itself seems to desire.
Indeed, one might argue that the principle of technological neutrality should not mean neutrality as between different wireless technologies and a withdrawal from harmonisation activities that are needed to enable those different technologies to co-exist efficiently. Rather, the principle may more properly be applicable to the relationship between wireless or spectrum-based technologies at a general level, or between such wireless technologies generally and other fixed-line technologies.
Ofcom’s proposals, whilst liberalising the use of spectrum, place the responsibility on operators to define the scope of their respective uses and to avoid interference with each other’s use. Such a system of private agreement between operators of the scope of usage rights is likely to be a recipe for disputes. Several considerations follow from this.
Firstly, clear guidelines are needed from Ofcom as to how it will interpret and apply the definition of “undue interference”. This term, as defined in s.183 of the Communications Act (amending s.19(5) of the Wireless Telegraphy Act 1949), is couched in general terms on the notion of interference which is “harmful”, i.e. which causes danger or the risk of danger to other services. The concept of “undue interference” is Ofcom’s sole factor for determining which changes of use of spectrum would be permissible and which would not.
Secondly, clear methods of measuring technical and geographical limits of spectrum use will be needed in order to enable performance and interference predictions so as to demonstrate whether a partitioning or change of use under a Wireless Telegraphy Act licence will be acceptable under Ofcom’s new framework. Interference risks can arise even if transfers of spectrum are separated geographically or by frequency, because the level of interference can be affected not only by boundary conditions but also by how transmitters on adjacent channels are deployed within the coverage area. Some smaller operators will not have the technical means to make such measurements.
Thirdly, before implementing a change of use or taking a transfer through partitioning of spectrum licence rights, operators will have to carry out their own commercial and legal due diligence to verify whether their proposed spectrum usage will be likely to be acceptable, even under Ofcom’s interference criteria. However, the likelihood of interference may be difficult to assess, as mentioned above, and, moreover, the terms of Wireless Telegraphy Act licences are not published and the new Wireless Telegraphy Register Regulations require publication of only basic information on the licence held, in particular the identity of the licensee, frequencies and geographical area covered.
Fourthly, this new environment appears to be a fertile ground for disputes but Ofcom is encouraging licensees to use alternative dispute resolution procedures rather than refer a dispute (not involving a licence breach) to Ofcom under the Communications Act 2003 dispute resolution procedure (s190(7)(a)). However, it is at best unclear as to whether an individual operator has a right of action to enforce the terms of another party’s Wireless Telegraphy Act licence (s14(7) of the Wireless Telegraphy Act 1949).
Again, one may ask whether these considerations are consistent with Ofcom’s apparent objectives of encouraging a multi-operator spectrum environment through its liberalisation and trading programme.
The application of Ofcom’s proposals to 3G mobile operations
Ofcom’s January 2005 Implementation Plan sets out detailed proposals on implementing trading and liberalisation for mobile services and, in particular, considers the following issues:
the removal of restrictions from licences that presently prevent the use of spectrum for 2G and 3G mobile services
the potential extension of spectrum trading and liberalisation to the bands currently licensed for 2G and 3G mobile services
Ofcom proposes removing restrictions from licences that prevent the use of spectrum for mobile services other than 3G services. As regards changes of use in favour of 3G mobile services, it proposes that further study is required before allowing changes of use from 2G to 3G, but that for other licences, restrictions preventing a change of use to 3G could be removed after a transitional period, which it suggests might last until 2007. In setting out these proposals, Ofcom explains the considerations of the European harmonisation measures affecting the use of the bands and the considerations surrounding the 3G auction in 2000 and the investments made by the successful tenderers in their 3G licences. In particular, Ofcom states that the possibility of changes of use from 2G to 3G licences might have an unfairly disadvantageous effect on the competitive position of Hutchison, the new entrant, which is present in the 3G but not the 2G sector. Ofcom is commissioning a further independent study to evaluate the scale of the issues concerning change of use from 2G to 3G services. This may, in turn, lead to further consultation.
Despite these considerations, Ofcom appears to be proposing to allow changes of use from non-2G services to 3G operations after 2007. At the same time, Ofcom is understood to be intending to release further spectrum, in the 2.6GHz band, for 3G use, as from 2008. If Ofcom allows changes of use under existing licences in favour of 3G operations, this would seem to involve inconsistent and discriminatory treatment on the terms of market entry, as between those operators who have entered the market pursuant to the auction process (for the 2GHz band in 2000 and possibly for those acquiring 3G spectrum rights pursuant to a future auction) and operators entering the market pursuant to a change of use. This raises questions under s3(3)(a) of the Communications Act, which requires Ofcom’s regulatory activities to be transparent, accountable, proportionate and consistent. Therefore, Ofcom’s caveats in its 3G-related proposals in its Implementation Plan do not seem to go far enough to address the legitimate expectations and concerns of existing 3G operators.
Ofcom’s spectrum trading and liberalisation programme is a welcome means of opening up access to spectrum, to enable private sector operators to fulfil their spectrum-related business plans and to facilitate the roll-out of new mobile services and products to consumers. However, there is a risk that Ofcom’s intended withdrawal from harmonisation activities will undermine these overall objectives, quite apart from being inconsistent with the applicable provisions of the EC Framework and Authorisation Directives.
Ofcom’s overall objectives could further be impeded by the degree of emphasis that it places on private arrangements between operators with regard to the acceptability of changes of use and partitioning of spectrum licences. The success or otherwise of Ofcom’s overall plan will be determined not only by the extent of liberalisation but also by the liquidity of spectrum markets and the confidence of investors. Such liquidity and investor confidence depends, in turn, on the overall regulatory framework, including the existence of measures to ensure the minimum necessary harmonisation for effective interoperability and effective enforcement measures. Ofcom is required by s.3(4)(d) of the Communications Act to focus on encouraging investment and innovation in relevant markets, as well as on the different needs and interests of all persons wishing to make use of spectrum (s.3(4)(f)). There is a danger that Ofcom’s proposals will, overall, disrupt the international technological co-ordination which is an essential prerequisite to the development of global mass markets with multiple suppliers of low cost equipment.