Spectrum License

Many Telecommunications services require an authorisation to use radio frequencies. Spectrum licenses that are required to provide a service are often granted as part of individual licensing process. It is necessary for instance to authorise cellular operators to use the required spectrum as well as authorising them to operate the cellular networks.

Authorisation to operate a telecommunications service and to use the required radio spectrum should be granted at the same time. There should be no delays to or risks inconsistent regulatory requirements as between the two types of authorisations. If two separate licenses are issued, they should be issued simultaneously. A good approach is to attach a draft spectrum license as well as a draft operator's license to a call for applications for license. The approach is discussed later in this Module.

One reason for retaining two separate licenses is administrative convenience in management of the spectrum. In most countries spectrum management is delegated to a different administrative group from that group of regulates other aspects of telecommunications operations, such as price regulation or anti-competitive conduct. By having a separate consistent form of spectrum license, technical reporting and compliance requirements can be standardised across all users of radio spectrum.

Spectrum Auctions, Lotteries and Comparative Evaluation Process

The radio spectrum is universally acknowledged to be a valuable limited public resource and thus subject to government regulations. Technological developments have expanded the usable portions of the spectrum and enabled the transmission of more and more information in the same amount of bandwidth. Despite these developments, an increasing number of telecommunications services and applications rely on spectrum, and thus demand for spectrum often exceeds availability. Hence here is a need to develop policies and approaches to assign spectrum. These approaches have similarities with other license processes, but there are also differences.

In the area of telecommunications monopolies, PTTs were often responsible for spectrum assignment, and the assigned spectrum for their own use as the need arose. Many countries have since developed new approaches to spectrum assignment to replace those used in the era of public monopolies.

Different approaches have been adopted to assign spectrum where demand exceeds availability. No consensus exists as to which approach is best in which case.

Traditionally, government often allocated spectrum to particular applications and then assigned parts of spectrums to entities to use for specific purposes on a "first come, first serve" basis. The approach is fast, practical and inexpensive, but not appropriate in today's competitive market. These approaches include lotteries, comparative evaluation approaches and auctions. Various combinations of these approaches have also been used. For example, applicants may be short-listed using a comparative evaluation approach and participate in an auction or lottery for the final assignment of spectrum.

Lotteries

Lotteries provide a fast, inexpensive and transparent approach for selecting from substantially similar or equally qualified applicants. Lotteries should generally be preceded by a form qualification process to select lottery participants. Otherwise, their use may hinder sector development. In the US, for Example, experience demonstrates that some past lottery participants had no intention of operating telecommunications services but simply planned to resell their spectrum licenses for a profit. Other lottery winners provide to be financially incapable of starting up service.

Comparative Evaluation Processes

Under a comparative evaluation approach, the regulator (or another government agency) decides as to whom the relevant spectrum is to be assigned. Comparative evaluation provides an approach for choosing among multiple applications that are substantially equal. It also allows regulator to match specific sectoral objectives with the operator in charge of achieving them.

There are many forms of comparative evaluation schemes. In some cases, spectrum licenses are awarded to applicants expected to make the best use of spectrum to serve the public. Comparative evaluation processes may involve the application of a variety of qualification and selection criteria. In most cases, these criteria will be published in advance and applicants will strive to demonstrate how their applications meet the criteria better than the other applications.

Minimum qualification requirements generally include evidence of financial resource, technical capability and commercial feasibility of relevant spectrum applications. Selection criteria may include proposed tariffs, coverage (geographical and in terms of users), network rollout targets, quality and range of service commitments, and the efficient use of frequencies. Some of the above criteria are applied in some cases as qualification criteria and in others as selection criteria, depending on the country and even on categories of service within a country.

There have been many criticisms of the comparative evaluation approach. Criticism generally focuses on lack of transparency. No matter how stringent the evaluation criteria, there is a subjective element to the most comparative evaluation processes. Hence they are sometimes referred to as a "Beauty Contest". Because of the subjective element, it is often suspected that regulators or other decision-makers may exercise their judgement impartially. In some cases these suspicions have led to litigation. In others, the suspicions are not acted upon, but they nevertheless undermine the credibility of the licensing process and the government or regulator.

Other criticisms of the comparative evaluation process focus on its speed. The process is often slow. Careful evaluation of financial capability, technical plans etc. Finally, comparative evaluation processes are sometimes criticised as involving inappropriate or unquestionable regulatory intervention in selection of winners and losers. It is often said the auction provide a better alternative to comparative evaluation, in that they rely on market forces rather than regulatory fiat to determine comparative outcomes

Auctions

Auctions are increasing used by regulators to grant spectrum licenses to the highest bidders. In the case of auctions, the market ultimately determines who will hold the spectrum licenses. However, in many auction schemes, bidders are pre-qualified using criteria similar to those used in comparative evaluation processes. As a result, participation in some auction is limited to bidders with proven financial and technical capabilities.

Experience with spectrum auction in the US illustrates the importance of using rigorous technical, financial and commercial criteria to pre-qualify bidders. In that country, some successful bidders later prove to be incapable of financing their aggressive bids. It appeared that others had neither the technical capability nor the intention of operating telecommunications services utilising the frequencies they had successfully bit on.

There are different types of spectrum auctions. The most common are:

• One round or simple auctions (open or closed)
  
• Multiple round auctions (sequential or simultaneously)
  

Initially developed in the US in the mid 1990s, the simultaneous, multi-round auction has become the most widely used auction approach. While there are variations from country to country, the approach generally involves a simultaneous auction for different spectrum licenses. There are rounds of bidding, which is series of consecutive bids, for each license. The bids continue to increase during these rounds until a high bidder is determined for each license.

At the beginning of each round, every bidder receives information about its eligibility to bid and about the standing high bid on each license. New bids must normally be higher than the standing high bid by at least a minimum pre-set amount. In some cases, bidders may have the opportunity to withdraw bid made earlier rounds, although this action is usually subject to penalties. Sometimes, an activity rule penalises bidders who are inactive by reducing their "bidder eligibility points". The rounds continue until there are no new bids on the license.

Some key features of simultaneous multiple round auctions are illustrated in Box 2-5 which describes the Canadian auction process.

There are many arguments in favour of spectrum auctions. Auctions provide an efficient and transparent and objective means of awarding spectrum licenses to the bidders who value them most highly. A proper pre-qualification process can ensure that successful bidders have the technical and financial capabilities to implement service quickly and efficiently. The high investment requirement to win an auction can be viewed as incentives for rapid rollout of infrastructure and services since that is the only way the successful bidder can recoup its investment in the license fee. Another argument in favour of spectrum auction is that they provide the means to provide public resource. Government can use the proceeds of the auctions for deficit reduction and other public priorities.

There are also arguments against spectrum auctions. First, it is argued that the high costs paid by the successful bidders are usually passed on to customers. The result can be excessive rates for consumers of wireless services, and reduced penetration, particularly among lower income consumers. Some argue that capital used to pay high auction fees will not be available to invest in network infrastructure.

 

Box 2-5:

Features of Multiple Round Auctions: The Canadian Example

1. Bidder Eligibility Points: Each license in an auction is assigned a number of points proportionate to the bandwidth and population covered by that license. Each bidder must indicate which licenses, and the number of "points-worth" of licenses; it may wish to bid on.

2. Activity Rule: A bidder is considered active on a particular license if it has the current high bid from the previous round or if it submits an acceptable bid in that current round. In each stage of bidding, a bidder must be active on licenses whose corresponding points add up to a certain percentage of the bidder's eligibility point level.

3. Bid Withdrawals/Penalties: If a bidder makes a bid and later wishes to change it, it may do so subject to paying a penalty which corresponds to the potential loss of revenue caused by the withdrawn bid.

4. Bid Increments: Bid increments are used to expedite the auction. They are set in percentage and/or absolute dollar terms and are changed during the course of the auction.

5. Waivers: Waivers protect bidders against mistakes they may make or in the case of technical of communication problems. They prevent a bidder from losing bidder eligibility points when it does not satisfy the activity requirements in a given stage.

6. Stopping rule: The auction generally stops when a round finishes with no acceptable bids or waivers having been submitted on any licenses.

7. Forfeiture: A bidder who submits the high bid on a license but fails to pay will forfeit its right to the license and must pay a penalty

Source: Department of Industry Canada (1998)

While it is arguable that a well-financed applicant should be able to pay for both, it is not possible to prevent strategic bidding to obtain spectrum. Banks, rating agencies and financial advisors have been critical of recent record-high auction fees paid for UMTS mobile spectrum in several European counties. Share prices and debt rating of some successful bidders have dropped due to widely-held perceptions that too much was paid by them in the auctions. Finally, high auction fee may discourage smaller participants from entering a telecommunications market. The result may be increased market concentration, and ultimately also higher consumer prices.

Simultaneous multiple round auctions have recently been used to license wireless service providers in Australia, Canada, Spain, the Netherlands, the United Kingdom and Germany. The recent UMTS (3G Cellular) licensing process provides some interesting cases studies in different spectrum licensing approaches. Box 2- 6 describes the quite different UMTS licensing process utilized in a variety of European countries.