Sunday 5 February 2012

Contents of module

Licence Fees and Spectrum Pricing

The issue of efficiency involves both technical efficiency, in using spectrum in a way that avoids mutual interference between users, and economic efficiency, in using spectrum as a scarce resource in a way that brings the greatest social gain. For reasons spelt out in Part 1, market mechanisms may not ensure that some public goods, such as emergency services, are adequately provided with spectrum. On the other hand, charging for the use of spectrum makes it likely to be used in less wasteful ways.

Further, when new radio services come along a mechanism is required to re-allocate spectrum from less valuable to more valuable services. In some cases technology comes to the rescue, when for example many fixed services can migrate quite painlessly off wireless and into cable or fibre. In other cases an administrative approach may be necessary, for example the non-renewal of licences.

But market mechanisms which, for example, allow users to bid in an auction for spectrum, are an alternative which have the advantage of being cheap to administer and relieve the regulator of the necessity of making what can seem like arbitrary or biased decisions in the allocation of frequencies and licences.

Auctions have been used by many administrations, notably the FCC in the USA, but the auctions for third generation (3G) universal telecommunications service licences (UMTS) in Europe during the summer of 2000 probably did more than anything else to focus recent attention on this issue. On the other hand, auctions can raise problems of their own as the controversies over 3G auction prices have shown.8

OFTA as a Trading Fund

OFTA has the status of a Trading Fund. (All Hong Kong legislation). This means that OFTA has the legal requirement to cover its costs and make a limited return on capital after paying a dividend to the Government. The principal source of revenue is income from licence fees and the use of spectrum, which typically account for between 80 – 90 per cent of turnover.

According to the Telecommunication (Amendment) Ordinance, para 321, Spectrum Utilization Fee reads as follows:

  1. Subject to the consultation requirement under section 32G(2), the Authority may by order designate the frequency bands in which the use of spectrum is subject to the payment of spectrum utilization fee by the users of the spectrum
  2. The Secretary may by regulation prescribe the level, or the method for determining the level, of spectrum utilization fees
  3. A spectrum utilization fee may be calculated on the basis of a royalty or any other basis that includes an element in excess of the simple recovery of the cost of providing a service by the Authority

In the financial year ended March 2000 turnover was HK$359,366,000 and operating costs HK$234,927,000 and profit after tax HK$144,642,000 from which a dividend of HK$30,474,000 was paid to the Hong Kong SARG.

This revenue and profit is the basis of OFTA’s financial independence from the Treasury and the industry9. The Trading Fund is supposed to target a rate of return over fixed assets of 13.5 per cent, but because of a surge in the use of mobile cellphones, and despite a decline in paging revenues, the rate of return hit 68.8 per cent in 2000.

The accumulated fund, which stood at HK$688,102,000 in March 2000, can be used for only one of two purposes, either to delay or reduce fees paid by the industry or to fund capital and income account items. This is to ensure the money is returned to the industry and not diverted to other uses. It is a transparent system because if the Government wished to use the funds for other social expenditures it would need to do so by raising taxes or increasing the dividend payments, and this would be subject to debate and agreement by the legislature.

Table 6 at the end of Part 6 lists the licence fees payable into the Trading Fund.

Spectrum Fees

Spectrum and licence fees are supposed to cover the administrative costs of the studies and monitoring required to plan and manage the relevant part of the spectrum, and the amount of frequency that is used, because the more frequency used the greater the problems of monitoring and managing interference. In addition a variable factor is built-in to encourage the use of higher frequencies in order to reduce the crowding at lower frequencies.

The following tables illustrate the structure of spectrum fees. Early calculations by OFTA estimated the manpower costs of managing spectrum for public mobile phone use would be around $50 per kHz and this figure was fixed, but the fee for building out base stations is variable, and falls beyond 50 base stations from $1000 to $500 per base station, and falls again beyond 100 base stations to $100 per base station.

Public Radiocommunications Service Licence Fee payable to OFTA
1-50 base stations $1000 per base station
51- 100 base stations $500 per base station
101 and above $100 per base station
1-200 mobile stations used by customers $6000
For every 100 mobile stations over 200 $3,000
For every 1 kHz of spectrum assigned $50

The following table shows the spectrum fees for fixed links used by fixed telecommunications network service (FTNS) licence holders. Below 1 GHz the fee is $50 per kHz, but between 1 – 10.999 GHz the fee is $(50 – 4f) where f = the frequency rounded to the nearest GHz. For example, if a fixed wireline operator used a microwave link of 9.45 GHz, the fee would be $(50-9) = $41 per kHz. Using a microwave link of 9.55 GHz would incur a fee of $40 per kHz. Above 19 GHz the fee is a flat rate of $1 per kHz.

FTNS Fee
Where f = frequency rounded to nearest GHz in the assigned band $1000000 + $750 per 100 connections +
  1. $50 per kHz below 1GHz
  2. $(50 - 4f) per kHz between 1 GHz and 10.999GHz
  3. $(20 - f) per kHz between 11 GHZ and 18.999GHz
  4. $1 per kHz above 19GHz
In cases where the spectrum is shared the fee is reduced proportionally
  1. Spectrum Pricing
    In September 1994 OFTA employed a consultant to report on the possibilities of introducing spectrum pricing as a means towards the more efficient use of spectrum in Hong Kong. The report, by Deloitte Touche Tohmatsu (DTT) Consultancy Study on the Introduction of Economic Mechanisms to Spectrum Management in Hong Kong, March 1995, was made public.

    The report points out that there are many different approaches to estimating the value of spectrum, for example using discounted expected future cashflows derived from the use of a frequency, or benchmarking the relative cost of using alternative services or technologies or frequencies, but they are all likely to yield prices which more correctly reflect the economic cost (that is, the opportunity cost) of using spectrum.

    A recent challenge has been the auctioning of third generation (3G) mobile licences. This is because the technology offers access to broadband mobile Internet services and Internet business models take the industry into a void of uncertainty. It is very problematic to know how to, or whether to, use traditional techniques of market valuation in the Internet environment, so there is less certainty that auction prices truly reflect the value of spectrum rather than other commercial considerations. This complicates the issue of spectrum pricing and presents a challenge for future policy making. (See Part 7)

  2. Tradeable Licences A related issue to spectrum pricing is that of tradable licences. The advantages include a market efficient means of reallocating spectrum subject to constraints upon usage set by the regulator to prevent interference or otherwise undesirable usage. It also allows licencees to exit a market for commercial reasons, and the more companies are free to exit the more likely they are to enter in the first place.

    The regulator again can impose ownership constraints where the competitive structure of the market is under threat. But for licences to be tradeable they need to be issued for periods of perhaps 10 or 15 years, and confer some form of property rights for that time. Tradeability could also apply to part of the spectrum covered by the licence, so ‘surplus’ frequency can be traded.

    Of course there are dangers associated with tradeability, including the incentive to ‘bank’ licences for future commercial gain rather than immediate usage. One way to tackle this problem is to introduce pre-qualification, whereby the regulator judges whether or not the applicant is serious about, and capable of, providing a radio service.

Licence Fees

Up to March 2000, OFTA issued over 106,000 licences. The following table lists the categories and the fees paid into the Trading Fund.

Licence Fee payable to OFTA
1. Private telegraph (reception) $20 per channel
2. Private telegraph (transmission) $55 per station
3. Private telegtaphtelegraph (transmission & reception) $22 per channel + $55 per station
4. Ship station $150
5. Aircraft station $150
6. Press reception (direct) $1500
7. Radio receiving station (not sound broadcasting) $80
8. Experimental station $300
9. Mobile radio system –  
fixed station $750
mobile station $300
10. Aeronautical VHF fixed station $1500
11. Radiophone Communication –  
fixed station $750
mobile station $370
12. Induction Communication $150
13. Radio dealers (restricted) $750 ($80 for auctioneer or pawnbroker)
14. Radio dealers (unrestricted) $1500
15. Demonstration, unestrictedunrestricted $300
16. Radiocommunications school $300
17. Amateur station $150
18. Model control $55
19. Industrial, Scientific and Medical Electrical $80
20. Radio paging system –  
fixed transmitting station $750
receiving station $80
21. Wide band link and relay station $150 per MHz
22. Broadcast relay station $360 for every 100 outlets
23. Closed circuit television $150 per transmitter + $80 per receiver
24. Broadcast radio relay station $750
25. Public Non-Exclusive Telecoms Service (PNETS) See above
26. Pleasure vessel radio network station $150
27. Radiodetermination and conveyance of commands, status and data $80
28. Hotel television (transmission) $150 per transmitter + $80 per receiver + $75 per MHz of occupied bandwidth for both transmitters and receivers
29. Public Radiocommunications Service (PRS) See above
30. Satellite Master Antenna Television (SMATV) $750 + $700 per 100 outlets
31. Fixed Telecoms Network Services (FTNS) $1000000 + $700 per 100 connections – see separately
32. Self-Provision External Telecoms Service (ETS) $750 + $6000 per Vsat requiring TA frequency coordination ($5000 not) + $17000 per earth station requiring TA coordination ($1100 not)
33. Public Radiocommunications Service (other than for land mobile services) $50000 + $1000 per land station or land earth station