yemen, 11-13 december 2005 price-setting process – methods of spectrum assignment economic aspects...
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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
Economic aspects of spectrum management for Arab States
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
Economic aspects of spectrum management for Arab States
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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.
Economic aspects of spectrum management for Arab States
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Spectrum market situation
● Features of Spectrum resource● Increase in spectrum access
demand ● Rebalance demand and supply of
Spectrum resource● Economic methods for spectrum
management
Economic aspects of spectrum management for Arab States
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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
Economic aspects of spectrum management for Arab States
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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).
Economic aspects of spectrum management for Arab States
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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)
Economic aspects of spectrum management for Arab States
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
Economic aspects of spectrum management for Arab States
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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?
Economic aspects of spectrum management for Arab States
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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.
Economic aspects of spectrum management for Arab States
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Place of economics of spectrum
Efficient use of spectrum
Assignment of spectrum rights within a particular
frequency band
Allocation of spectrumto categories of use
Economic aspects of spectrum management for Arab States
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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
Economic aspects of spectrum management for Arab States
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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.
Economic aspects of spectrum management for Arab States
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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
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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.
Economic aspects of spectrum management for Arab States
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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.
Economic aspects of spectrum management for Arab States
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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.
Economic aspects of spectrum management for Arab States
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Lottery
Method for spectrum assigning licenses or spectrum rights to licenses or spectrum rights to applicants selected at random.applicants selected at random.
Economic aspects of spectrum management for Arab States
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Auction
1.Licenses are awarded by bidding among competing spectrum applicants.
2. Auction award to those who value them most highly while simultaneously
Economic aspects of spectrum management for Arab States
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
Economic aspects of spectrum management for Arab States
Source: ITU Report SM 2012
2222
GSM & UMTS Spectrum Licensing
Economic aspects of spectrum management for Arab States
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
Action & Beautycontest
Source: ECC Report 65
2323
Assignment of FWA / WLL Spectrum
Economic aspects of spectrum management for Arab States
Results assignment of FWA/WLL spectrum by different methods
FWA / WLL
5
8
21 Action
Beauty contest
Action & Beautycontest
Notification+radiolicence
2424
Broadcasting TV & Analog radio
Economic aspects of spectrum management for Arab States
Instruments used for assignment of broadcasting spectrum
Analog radio
1
4
1Action
Beauty contest
Action & Beautycontest
Digital TV
0
7
1Action
Beauty contest
Call fo tender, freespectrum
Source: ECC Report 65
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.
Economic aspects of spectrum management for Arab States
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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.
Economic aspects of spectrum management for Arab States
Source: ITU Report SM 2012
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.
Economic aspects of spectrum management for Arab States
Source: ITU Report SM 2012
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Form of Administrative pricing
Administrativespectrum
pricing
Shadowpricing
Incentive pricing
Regulatory Pricing
Economic aspects of spectrum management for Arab States
Source: ITU Report SM 2012
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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.
Economic aspects of spectrum management for Arab States
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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).
Economic aspects of spectrum management for Arab States
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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.
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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.
Economic aspects of spectrum management for Arab States
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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.
Economic aspects of spectrum management for Arab States
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• 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
Economic aspects of spectrum management for Arab States
Source: ECC Report 53
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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
Economic aspects of spectrum management for Arab States
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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.
Economic aspects of spectrum management for Arab States
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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).
Economic aspects of spectrum management for Arab States
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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
Economic aspects of spectrum management for Arab States
Source: ECC Report 53
3939
2- State-financed model
money ‘policy’
money (‘budget’)
(internal) cost-accounting system “bill”
Spectrum Management Organisation (SMO)
State budget/ ministry Licence-
holders
reflects all kind of policy, economic or societal considerations
e.g. Denmark, France, Czech Rep.
Malta, Poland
Economic aspects of spectrum management for Arab States
Source: ECC Report 53
4040
3- Charge-based model with cost-allocation
‘money’
“policy”
“bill”
Spectrum Management Organisation (SMO)
General budget/ministry
Licence-holders
reflects the costs of the SMO
cost-allocation system
e.g. Netherlands, Sweden
Economic aspects of spectrum management for Arab States
Source: ECC Report 53
4141
4- Charge-based model without cost-allocation
“policy” ‘Money’
“bill”
Spectrum Management Organisation (SMO)
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
Economic aspects of spectrum management for Arab States
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5 a - Hybrid fee & charge-based model ‘money’ (Total bill: (fee + charge))
‘Policy’
money to cover “bill” costs of ‘SMO’ (=charge part of bill)
Spectrum Management Organisation (SMO)
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
Spectrum Management Organisation (SMO)
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
Economic aspects of spectrum management for Arab States
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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
Economic aspects of spectrum management for Arab States
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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
Economic aspects of spectrum management for Arab States
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Enhancement of SMO
Other developments:• Auctions vs. spectrum fees• Charges/Fees and outsourcing• Flexible regulatory framework• Licence exemption• Technological developments
Economic aspects of spectrum management for Arab States
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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
Economic aspects of spectrum management for Arab States
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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
Economic aspects of spectrum management for Arab States
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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.
Economic aspects of spectrum management for Arab States
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Economic aspects of spectrum management for Arab States