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acma | xvi
Contents (Continued)
Introduction 1
Background 1
The ACMA’s implementation approach 4
Implementation of OC pricing in the 400 MHz band 5
Issues 6
Instances where administrative pricing is preferable to auctions 7
Submissions 7
The ACMA response 7
Opportunity cost pricing methodology 8
Submissions 8
The ACMA response 8
Wider application of opportunity cost pricing to government and community users of spectrum 10
Submissions 10
The ACMA response 10
The 400 MHz band case study 12
Submissions 12
The ACMA response 12
Application of opportunity cost pricing to other bands 13
Submissions 13
The ACMA response 13
Timeframe for the introduction of opportunity cost pricing 14
Submissions 14
The ACMA response 14
Other comments 15
acma | xviIntroduction
On 23 April 2009, the Australian Communications and Media Authority (the ACMA) published the Opportunity Cost Pricing of Spectrum: Public consultation on administrative pricing of spectrum based on opportunity cost consultation paper (the OC pricing consultation paper). The paper sought public comments and feedback on the ACMA’s proposal to set administrative prices for spectrum in accordance with the principle of opportunity cost. The OC pricing consultation paper was also presented at the Radcomms 09 conference in Sydney in late April. Submissions to the consultation paper closed on 5 June 2009. The ACMA received 10 public submissions to the consultation paper from members of the telecommunications, radiocommunications and broadcasting industries and government organisations. Responses to the 3.6 GHz consultation[1] in early 2009 also included comments on the application of opportunity cost (OC) pricing.
Submissions were received from the following organisations:
Austar
Australian Broadcasting Corporation (ABC)
Australian Radio Communications Industry Association (ARCIA)
Australasian Railway Association
Department of Defence
Motorola
South Australian Government
Telstra
Victorian Government
Victoria Police.
These public submissions can be viewed here: www.acma.gov.au/WEB/STANDARD/pc=PC_311707.
The purpose of this paper is to:
summarise the issues that were raised in response to the consultation paper
provide the ACMA’s response to these issues
indicate the ACMA’s preferred direction for implementation of price changes.
Background
When there is excess demand for spectrum, the ACMA typically prefers market or price-based allocations and liberalised spectrum management arrangements that encourage secondary trading.[2]
The ACMA considers that, in general, market mechanisms are likely to be more effective than the regulator in achieving an efficient allocation, and facilitating changes in spectrum use to ensure that the allocation remains efficient over time as market conditions, technology and consumer preferences change.
Spectrum users are generally better placed than regulators to determine their willingness to pay for spectrum. Where firms are competing to provide similar services, higher willingness to pay will reflect higher value to society—for a given set of market conditions, the firm with the highest willingness to pay will be the one which can supply the service most efficiently. Typically, a price-based allocation such as an auction will reduce the risk of regulatory failure arising from the lack of information available to the regulator about the costs, revenues and economic trade-offs facing spectrum users.
However, auctions will not be appropriate in all circumstances. As discussed below, in some cases administrative allocation may be preferable even when spectrum is in high demand. In these cases, the ACMA will seek to encourage trading, and where appropriate, will use administrative prices to promote an efficient allocation of spectrum over time, consistent with the object of the Radiocommunications Act 1992 (the Act).[3]
The OC pricing consultation paper outlined a proposed approach for improving the basis on which the ACMA sets prices for administratively allocated spectrum.
The opportunity cost of a part of the radiofrequency spectrum is the highest value alternative use that is denied by granting access to one party rather than to the alternative.
When markets set prices they will often be based on opportunity cost (OC). Well functioning markets with prices that reflect OC are typically efficient along three dimensions: allocative, productive and dynamic.[4]
Allocative efficiency: The mix of goods and services that are produced in the economy is such that no other mix can increase the wellbeing of society.
In terms of spectrum, users of spectrum should be such that the right final mix of spectrum-related products is being made available.
Productive efficiency: Production of goods and services ought to be undertaken at the lowest possible cost (cost is measured in terms of inputs).
In terms of spectrum, users of radio spectrum should choose inputs (capital, labour and spectrum) in order that production of services is at the lowest overall cost.
Dynamic efficiency: Resources are deployed in a way that encourages the most desirable level of research, development and innovation. In terms of spectrum, the right amount of innovation in spectrum use and spectrum-related products should be encouraged to enable supply and demand to interact over time to optimise allocation and technical outcomes.
When administratively allocated spectrum can be traded, the licensee implicitly faces the opportunity cost of spectrum in deciding to retain a licence rather than sell it to another party. However, even when spectrum is tradeable, administrative prices can play an important and complementary role in promoting all three dimensions of efficiency. Pricing may be a particularly important tool when: trading volumes are low because of characteristics of the market (e.g. high transaction costs, thin markets, or uncertainty); or if it is useful to ensure that licensees face an actual cost (e.g. for government users who may face lower incentives to trade spectrum).
Prices for administratively allocated spectrum (annual taxes) are currently set to create incentives for the efficient allocation and use of the spectrum and enable cost recovery. To date, the ACMA has not priced spectrum based on directly calculated opportunity cost. Setting prices for administratively allocated spectrum with reference to its opportunity cost is intended to improve the efficiency of spectrum allocation.
The ACMA’s implementation approach
OC pricing is intended to contribute toward the ACMA’s first two Principles for Spectrum Management:[5]
1/ allocate spectrum to the highest value use or uses
2/ enable and encourage spectrum to move to its highest value use or uses.
The ACMA has used administrative incentive pricing for more than a decade and the OC pricing methods outlined in the consultation paper are intended to improve these prices.
Many of the submissions expressed general support for OC pricing. Some submissions made useful comments about the methodologies for calculating opportunity cost. Several submitters also asserted that they should be exempt from OC pricing because of the public good and positive externalities derived from the services that they provide. Some also stated that under the object of the Act, the ACMA had an obligation to make adequate provision of spectrum for public and community users.
The ACMA has considered the issues raised by stakeholders during the consultation period. Some of the key issues raised, and the ACMA’s responses are presented in more detail in the ‘Issues’ section of this document.
After considering the issues, the ACMA has decided to use OC pricing as one of a suite of tools for managing spectrum that also includes technical frameworks, and licensing arrangements. The issues raised in submissions will assist the ACMA to transition towards OC pricing over time.
The application of OC pricing to administratively allocated spectrum will require a band-by-band assessment to determine priorities for the ACMA. Priorities will be reflected in the Five-year Spectrum Outlook,[6] and be influenced by factors such as the levels of congestion and the expected benefits of implementing OC pricing.
In order to provide both transparency and guidance, the ACMA will apply the following high level principles to determine priority bands in which to implement OC pricing. This includes bands where an auction is not considered optimal but:
there is evidence of congestion; or
there is evidence of inefficient pricing; or
new high-value uses become apparent; or
there are expected net benefits to OC pricing; or
OC pricing is expected to contribute to the object of the Act.
OC pricing might not be appropriate in instances where:
the Minister directs the ACMA to manage spectrum in a particular manner; or
the ACMA does not consider the expected benefits from changing prices in the band justify the allocation of the ACMA’s resources required to estimate the opportunity cost of that spectrum.
Bands that are considered to exhibit high demand, or where there is an expectation that demand will be high in the near future (and where an auction is not considered to be an appropriate allocation method), may be priorities for OC pricing.
It may also be appropriate to review existing prices in bands exhibiting significant excess supply. When there is substantially more spectrum than is required to meet current and expected levels of demand, the opportunity cost of that spectrum may be close to zero.
This is likely to be true in sparsely populated regional and remote areas for many frequency rangesand in areas of moderateor lowpopulation density for higher frequency microwave bands. A general review of fees in remote areasand in higher frequency microwave bands may identify instances where some licensees may be paying fees that are significantly higher than the opportunity cost of that spectrum. Where this is found to be the case, the ACMA will continue to set administrative charges to cover the direct cost of services (such as licence issue or renewal), but the ACMA will alsomove toset annual apparatus licence taxes at aratethatreflects the low opportunity cost anddoes not discourage use of spectrum.
Opportunity cost may also be low when devices operating in part of the spectrum do not hinder others from also using that spectrum. If the low interference potential of the device means that no alternative use of the spectrum is being denied, itisalsolikely tobe appropriate to set the annual apparatus licence taxes ataratethatreflects the low opportunity costand does not discourage use of the spectrum.
Implementation of OC pricing in the 400 MHz band
The OC pricing consultation paper used the 400 MHz band as a case study to demonstrate OC pricing methods because the ACMA is currently considering a number of options for improved regulatory arrangements in that band. In early 2010, the ACMA intends to publish a consolidated proposal outlining arrangements for the management of the 400 MHz band which will include licensing, technical and pricing elements. These issues are not addressed in detail in this paper.
The specific pricing proposals for the 400 MHz band will require amendments to the Apparatus Licence Fee Schedule and will be proposed in amendments to the determinations:
Radiocommunications (Transmitter Licence Tax) Determination 2003 (No.2)
Radiocommunications (Receiver Licence Tax) Determination 2003 (No.2).
The specific pricing proposals will be subject to public consultation. The timeframe for implementing price changes will be determined thereafter.
The next section contains the issues raised in public submissions, and the ACMA’s response to each issue.
Issues
The ACMA sought comment on the following issues:
1/ Opportunity cost pricing is a tool to assist in the administrative allocation of spectrum bands. The ACMA invites comment on the proposal to adopt OC pricing as the preferred pricing methodology for administratively allocated spectrum.
2/ In the 400 MHz band the ACMA proposes to increase apparatus licences tax in high density areas (Sydney/Wollongong, Melbourne/Geelong, Brisbane/Gold Coast) over five years. The ACMA does not propose changes to the tax in medium, low and remote density areas at the current time.
3/ General comments on the direct cost calculation methodology and the implications of changes to location weightings, adjustment factors and spectrum denial factors in the Apparatus Licence Fee Schedule.
4/ The instances where administrative pricing is preferable to auctions.
5/ The wider application of opportunity cost pricing to government and community users of spectrum.
6/ General comments about the opportunity cost pricing case studies presented in this paper.
7/ General comments on the bands where the application of opportunity cost pricing should be considered as a priority.
8/ The appropriate timeframe for the introduction of any price changes based on opportunity cost pricing.
The issues raised by stakeholders in the submission process represent a wide range of views. While some submitters acknowledged the merits of applying OC pricing principles to administratively allocated spectrum, they suggested some important caveats on its implementation. Other submitters were supportive of OC pricing principles but argued for a deferral of its application to the 400 MHz band or other bands. Other submitters argued for an exemption from the application of OC pricing, citing public interest uses.
The ACMA reviewed and gave careful consideration to the issues raised in submissions. The next section describes the general issues raised in the submissions. A brief summary of each issue is provided, followed by the ACMA’s response to each issue.
Instances where administrative pricing is preferable to auctions
The OC pricing consultation paper outlined circumstances where auctions may be the preferred allocation method for spectrum and instances where administrative allocations offer a preferred approach to spectrum management.