Applying spectrum pricing to the Maritime and Aeronautical sectors · 2016-08-25 · Applying AIP...

Applying spectrum pricing to the Maritime and Aeronautical

sectorsConsultation document

Consultation

Publication date: 30 July 2008

Closing Date for Responses: 30 October 2008

Applying AIP to the Aeronautical and Maritime sectors

Contents

Section Page 1 Summary 1

2 Introduction and background 13

3 Ofcom’s objectives and approach in applying AIP 20

4 Initial pricing proposals 37

Annex Page

1 Responding to this consultation 59

2 Ofcom’s consultation principles 61

3 Consultation response cover sheet 62

4 Consultation questions 64

5 How we will assess the impact of any fees 66

6 Ofcom response to specific issues previously raised by stakeholders 76

7 Maritime VHF channel density 92

8 Worked example applying channel density and coverage framework to maritime VHF licences 93

Applying AIP to the Maritime and Aeronautical sectors

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Section 1

1 Summary Spectrum is a vital resource for the UK economy, including the aeronautical and maritime sectors

1.1 The civil aeronautical and maritime sectors are significant contributors to the UK economy and their ability to operate safely and efficiently is dependent on access to radio spectrum. Their use of VHF radiocommunications, radar and other radionavigation aids together occupies about 7% of spectrum below 15GHz1.

We need to create strong incentives to ensure that spectrum is used efficiently

1.2 Generally, the use of spectrum for one purpose denies its availability to other users. Spectrum is a finite resource, and the evolution of new spectrum-reliant services means that there is ever-growing pressure on this resource to meet the demands of cirizens and consumers.

1.3 It is neither feasible nor desirable for Ofcom to try and determine, on behalf of citizens and consumers, exactly how spectrum should be used, or how much spectrum should be allocated to a particular application. Ofcom’s approach is, instead, to create clear incentives for decision makers (users, government and society at large) to use spectrum efficiently. In particular, we seek to ensure that users can determine their need for spectrum in light of the cost which this imposes on society.

The contribution that price signals can make has long been recognised

1.4 Since 1998, the Radiocommunications Agency and subsequently Ofcom have set about achieving this by applying a system of Administered Incentive Pricing (“AIP”), along with using auctions to allocate released spectrum, and making spectrum licences liberalised and tradable. All of these measures are aimed at enabling users to take decisions about their use of spectrum, in light of its value to other uses and users.

1.5 AIP is intended to apply market disciplines to the holding and use of spectrum rights, by requiring users to consider their spectrum needs in light of the AIP fees payable. AIP is already paid by most private sector users of spectrum, except where upfront fees have been set at auction. Many public sector users, including the Ministry of Defence (“MOD”) and the emergency services, also pay AIP.

We are taking forward a spectrum management strategy developed since 1998 and endorsed by government

1.6 In 2004 the Government commissioned a major review of spectrum holdings from Professor Martin Cave. The review considered what action could be taken to release the maximum amount of spectrum to the market and increase opportunities for the development of innovative new services.

1 See Chapter 1 to Independent audit of spectrum holdings – An independent audit for Her Majesty’s Treasury December 2005 at http://www.spectrumaudit.org.uk/pdf/20051118%20Final%20Formatted%20v9.pdf


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1.7 One of Professor Cave’s key recommendations, set out in a wide ranging report2 published in December 2005 (the “Cave Audit”), was that AIP should be extended to the civil aeronautical and maritime sectors where it has the potential to help increase efficiency of spectrum use now or in the medium to long term.

1.8 The Government, in its response to the report published on 22 March 20063, agreed that “there is a strong case for introducing pricing to civil aeronautical spectrum where current use imposes an opportunity cost”. The Government also reported that, subject to consultation, Ofcom with the Maritime and Coastguard Agency (MCA) would extend AIP to cover certain maritime radionavigation and communication systems, on a similar timescale as that proposed for introducing AIP for aeronautical services.

1.9 In June 2006, Ofcom commissioned consultants Indepen and Aegis to consider how AIP might be applied to the aeronautical and maritime sectors. The consultants’ report4 was published by Ofcom in March 2007, without detailed comment from Ofcom. A number of key stakeholders provided detailed comments to Ofcom, which we have considered alongside other inputs in drawing up our initial proposals. Since then, in addition to discussion with the Department for Transport (“DfT”), the Civil Aviation Authority (“CAA “) and the Maritime and Coastguard Agency (“MCA”), we have held stakeholder workshops to explain the issues and seek feedback from interested parties.

We now need to consider the practical implications of this strategy for the aeronautical and maritime sectors

1.10 The Cave Audit and the Indepen report looked, in different ways, at the case for pricing this spectrum, but not directly at the potential effects on users. Assessing the impact of any proposed fees is an essential part of Ofcom’s job in implementing this strategy.

1.11 The aeronautical and maritime sectors are complex, encompassing very large international businesses, smaller businesses, individuals, and organisations with charitable aims (such as the RNLI). We need to understand the impact throughout the sectors and this will require considerable input from stakeholders. In particular, we are seeking input from spectrum users, based on the opportunity costs indicated in this document, but we will also wish to consider carefully the views of the UK bodies responsible for air and maritime regulation and industry sponsorship: the CAA, the MCA and the Department for Transport.

1.12 We are therefore issuing this initial consultation, in which we set out the principles of our approach, and the implications of indicative opportunity costs for potential fee levels in one category of licence (VHF radiocommunications in both sectors), in order to enable stakeholders to consider what we need to take into account before proposing fee rates for any bands.

2 See footnote 1 3 See Independent audit of spectrum holdings - Government response and action plan March 2006 at http://www.spectrumaudit.org.uk/pdf/Governmentresponse.pdf 4 http://www.ofcom.org.uk/research/radiocomms/reports/spectrumaip/aipreport.pdf


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We are proposing a phased approach

1.13 We are proposing a two stage approach, with pricing of VHF radiocommunications channels being taken forward before any pricing of radar and aeronautical radionavigation aids. It is possible that aeronautical and maritime VHF channels may attract AIP fees from 2009. Radar and aeronautical navigation aids will not attract AIP fees before 2010.

1.14 The reason for this two stage approach is that we believe the pricing regime for Business Radio, which was set out in Ofcom’s statement Modifications to spectrum pricing5 published in January 2007, provides an effective and reasonable template for pricing maritime and aeronautical VHF channels. If, following responses to this consultation and our consideration of those and other evidence available, we conclude that this template is suitable, it should be a relatively simple task to design a pricing matrix to apply to maritime and aeronautical VHF channels. We are setting out initial proposals framed on this basis.

1.15 In contrast, the task of devising an appropriate methodology for apportioning fees to radar and aeronautical navigation aids is much more complex, and Ofcom is proposing to work closely with stakeholders (including the DfT, the CAA and the MCA) before making any formal proposals. In this consultation document we are setting out proposed reference rates for these spectrum bands (expressed as a rate per 1 MHz of national bandwidth). However, we have not attempted to articulate how these reference rates should be translated to fees for specific licences.

The purpose of this consultation is to assist stakeholders in expressing views on how the policy of extending pricing to these sectors should be implemented

1.16 After considering responses to this consultation exercise, Ofcom expects to consult more formally on specific fee proposals for maritime and aeronautical VHF radiocommunications channels before making the necessary Regulations to implement those fees. This second consultation will also set out Ofcom’s considered view on the appropriate level of reference rates to apply to radar and aeronautical radionavigation aids. At that time we also hope to explore in more detail some of the factors which Ofcom would expect to take into account when deriving individual licence fees, for radar and aeronautical navigation aids, from those reference rates.

1.17 In making those further proposals, Ofcom needs to be informed by the views of stakeholders (spectrum users, government and sector regulators). This initial consultation is intended to set out a proposed framework and some reference points to enable stakeholders to respond on an informed basis, providing insights on the possible impacts of different approaches. In light of responses, Ofcom will develop an Impact Assessment in relation to any fees we propose.

5 See Statement at http://www.ofcom.org.uk/consult/condocs/pricing06/statement/statement.pdf Regulations implementing these new fees for Business Radio were held pending the introduction of Ofcom’s new electronic process for managing spectrum licences.


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Some maritime and aeronautical uses of spectrum will not attract AIP fees

1.18 We have no plans to apply AIP fees to ship radio licences, and we are not minded to charge fees to aircraft either. We are inviting views on whether charities whose objective is the safety of human life in an emergency should receive a discount. We are not proposing to charge fees for maritime and aeronautical distress channels.

We think there is scope to improve the information for future policy decisions if DfT pays for reserved spectrum, and also, potentially, if DfT recognises the opportunity cost of some other spectrum

1.19 We also consider that the DfT, as the government department responsible for these sectors, could usefully face some incentives to ensure that spectrum allocations, and obligations to use spectrum, are decided efficiently.

1.20 The Cave Audit recommended that the Government should “make a clear commitment to the principle of paying AIP charges on its spectrum holdings”, and the Government’s response gave this commitment. In the case of aeronautical and maritime bands, we consider that this principle could be applied to any unused spectrum that DfT wishes to reserve for the civil maritime and aeronautical sectors. Whether, and when, to apply this principle is a matter for Government to decide.

1.21 Additionally, there are some aeronautical and maritime uses for which we are not proposing to set licence fees based on AIP, because we do not currently see an efficiency benefit from doing so. Examples are airborne-only radionavigation uses, and the allocations for EPIRBs and distress communications channels. While decisions by individual users would not, in the current circumstances, affect the use of the spectrum, there is potential, in the longer term, for Government’s policy decisions to result in changes that could improve the efficiency with which the spectrum is used. We therefore see efficiency potential in arrangements that would ensure Government took the opportunity cost of the spectrum in airborne-only radionavigation use (but not EPIRBs or use of VHF distress channels) into account. It is for Government to consider whether this would be appropriate, and if so, to devise the precise arrangements for this to happen: one option would be for DfT to make payments in respect of this spectrum, but there may be other ways of securing the objective of informing future policy decisions.

Where we propose fees, we will consider whether timing should be phased

1.22 Where the introduction of AIP fees can be expected to have a significant effect on businesses, we would expect to phase in any such fees over a number of years. Ofcom recognises that the ability of some spectrum users to pass on costs may be constrained in the short term variously by contractual and investment commitments, business plans and the market environment, and sector regulation.

Summary of proposals

1.23 The tables below set out in summary form our initial proposals, on which we are inviting comment.


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Figure 1 Summary of proposed approach

Scope Our proposal The spectrum bands which are included in this review.

Reflecting the scope of the Cave Audit, this review is considering maritime and aeronautical spectrum above 75 MHz and below 15 GHz.

The services which may be affected Our proposal The equipment licences which may attract AIP fees.

We are consulting on whether fees should be paid in respect of spectrum used by the following facilities: • VHF communications channels (but

excluding distress channels) • X band, S band and L band primary

radar (not Ku band) • Aeronautical secondary surveillance

radar • Aeronautical navigation aids including

Instrument Landing Systems (“ILS”), Microwave Landing Systems (“MLS”), Distance Measuring Equipment (“DME”) and VHF Omni directional Range stations (“VOR”)

• Radio altimeters, weather radar and Doppler aids

The parties who may face AIP fees Our proposal Spectrum users Regulators and government

We are proposing that the licensed operators of aeronautical and maritime ground stations should pay fees. This may include, for example, ports, marinas, sailing clubs, coastal watch stations, lighthouse authorities, airports, and providers of air traffic and air navigation services. All of these parties already pay fees to cover the administrative cost of issuing licences. We are suggesting that Government consider the option of DfT facing the opportunity cost of unused spectrum reserved for the civil maritime and aeronautical sectors. We are also suggesting that Government consider the scope for policy decisions relating to airborne-only bands being informed if the DfT recognises the opportunity cost of the spectrum (excluding VHF communications). Whether DfT pays, and how much, would ultimately be a matter for Government to decide.

Users who will not face AIP fees Our proposal • We will not apply AIP fees to ship

radio licences


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• We are also proposing that we should not apply AIP fees to aircraft WT Act licences

• We are consulting on whether we should apply a discount to any users, such as charities whose object is the safety of human life in an emergency.

• We are not proposing to charge training schools for the use of VHF transmitters modified to limit output to within the classroom.

Timing Our proposal Phase 1 Phase 2

We propose to move forward with AIP-based fees for VHF radiocommunications before introducing fees for radar and other radionavigation aids. It is possible that fees for VHF communications could be applied from 2009. Algorithms for apportioning fees to individual users of radar and other radionavigation aids will, potentially, be more complex, and will require more extended discussion with stakeholders before firm proposals can be set out. AIP-based fees for radar and other radionavigation aids will not be implemented before 2010.

How we are proposing to determine AIP fees for VHF communications.

Our proposal

General approach

Our initial view is that it would be appropriate for users of maritime and aeronautical VHF channels to pay fees comparable (on a £ per MHz basis) to fees charged to users of Business Radio. We are proposing to apply similar principles to the development of the fee structures for both aeronautical and maritime users of similar VHF spectrum; and to apply similar rates per MHz of spectrum used by both sectors. How much each Business Radio user pays currently depends on (i) the relative popularity of the particular frequency band (“Highly popular”, “Medium popular” and “Less popular”), (ii) the extent of the geographic coverage achieved by the transmitter and antenna (three classes), (iii) the density of population in the coverage area (3 classes), (iv) whether the channel offers exclusive or shared use, and (v) whether the channel is simplex or duplex.


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Maritime VHF channels Band popularity Geographic coverage Density of channel assignments at specific locations Sharing of maritime channels Implications for maritime licence fee levels Aeronautical VHF channels Band popularity and channel coverage

We are proposing that internationally harmonised maritime channels (which are heavily congested) should be priced as though occupying “Highly popular” bands, and the UK-allocated channels priced as though occupying “Medium popular” bands. We propose to classify all maritime assignments on the basis of power output (expressed in watts) and antenna height (expressed in metres), in line with the 3 standard classifications which apply to Business Radio – “High coverage”, “Medium coverage”, and “Low coverage”. We also propose to vary maritime VHF licence fees to reflect the relative density of channel assignments at the particular location. Our current view is that those 50km x 50km geographic grid squares with more than 125 assignments (international, UK coastal and marina combined) should be considered “High density”, those with between 125 and 20 assignments should be considered “Medium density” and those with fewer than 20 assignments should be considered “Low density”. Our proposal for applying this classification across the UK is set out on the map at Annex 6. We are proposing that shared marina channels would be charged 50% of the standard applicable rate. If maritime VHF channels were charged for on the basis outlined above, this would result in licence fees at the levels summarised in figures 2 and 3 below. Our current view is that aeronautical channels (which are heavily congested) should be priced on a basis which assumes that they occupy “Highly popular” bands and should be considered to provide UK-wide coverage, but with some reuse of channels (which we are proposing should attract a 50% discount). If these channels are considered to offer national coverage, as we suggest, there would be no need to


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Implications for aeronautical licence fee levels

differentiate to reflect differing levels of congestion at different locations. If aeronautical VHF channels were charged for on the basis outlined above, this would result in licence fees at the levels summarised in figure 4.

How we are proposing to determine AIP fees for radar and aeronautical navigation aids

Our proposal

General approach to pricing spectrum used for radar and aeronautical navigation aids Reference rates Approach to apportioning fees to individual licensees Unused spectrum reserved for future use

We are setting out in this consultation our current view of the appropriate reference rate for each band. This is expressed in terms of a price for a nominal bandwidth of 1 MHz with UK-wide coverage. Our initial view on appropriate reference rates is set out in figures 5 and 6 below. We are proposing to work closely with all stakeholders (including spectrum users, as well as the DfT, the CAA and the MCA) to determine an efficient way of apportioning opportunity cost estimates to individual licensees, to identify fee levels. The Public Safety Services Test Group (“PSSTG”) and the Radar Group (whose memberships are drawn from CAA, MCA and MOD) are currently reviewing scope for efficiency improvements across these bands, and this work is likely to remain important in co-ordinating future changes. Some of the aspects of use that it may consider would be relevant in determining the opportunity cost of individual assignments, and we would expect to take account of any information available from that work. In respect of aeronautical use of radar and other radionavigation aids, the CAA’s current planning tools also appear to be well suited to assisting with this analysis. Ofcom recognises that any assessment of the bandwidth and territory sterilised to alternative use by any given use will be strongly influenced by assumptions about tolerable field strength. We are proposing that DfT consider making payments in respect of the opportunity cost of any remaining spectrum which DfT, MCA or CAA wish to reserve for civil use by the


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aeronautical and maritime sectors. A decision on this is, however, a matter for the Government not Ofcom.

Emergency Position Indicating Beacons (EPIRBs) and Emergency Locator Transmitters (ELTs)

Our proposal

These beacons are used by ships and aircraft in distress. In principle, spectrum reserved for these uses has a cost. As Ofcom is not proposing to charge AIP fees for WT Act licences for ships and aircraft, there is an argument that payments should be made by DfT, or other arrangements made to ensure this opportunity cost is taken into account in future policy decisions. However, Ofcom currently holds the view that the amount of spectrum concerned is so small that payments calculated on an opportunity cost basis are unlikely in practice to have any incentive effect on a large government department such as DfT. We are not, therefore, proposing that payments should be made in respect of this spectrum.

1.24 This initial consultation is intended, in part, to allow stakeholders to provide the information we will need in order to assess the impact of any fees. We will need to conduct a full Impact Assessment of the type discussed in Annex 5, before we can propose fee levels for any licences. In the absence of that assessment, we are providing an indication of what applying the principles above would imply for fees, if (as seems unlikely) nothing arises from consultation responses, or in our Impact Assessment, that indicated we should amend the application of those principles.

Figure 2 Indicative annual fees from applying the principles in this consultation to international simplex maritime 25kHz VHF channels

High coverage (Watts/Antenna metres) W> 5 and A > 10 or W ≤ 5 and A > 30

Medium coverage (Watts/Antenna metres) W ≤ 5 and 10 < A ≤ 30 or W> 5 and A ≤ 10

Low coverage (Watts/Antenna metres) W ≤ 5 and A ≤ 10

Geographic area Exclusive Shared (Marina)

Exclusive Shared (Marina)


High density £1480 £740 £740 £370 £200 £100 Medium density £300 £150 £200 £100 £100 £75 Low density £110 £75 £95 £75 £75 £75


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Figure 3 Indicative annual fees from applying the principles in this consultation to UK simplex maritime 25kHz VHF channels

High coverage (Watts/Antenna metres) W> 5 and A > 10 or W ≤ 5 and A > 30

Medium coverage (Watts/Antenna metres) W ≤ 5 and 10 < A ≤ 30 or W> 5 and A ≤ 10

Low coverage (Watts/Antenna metres) W ≤ 5 and A ≤ 10

Geographic area Exclusive Shared (Marina)




Figure 4 Indicative annual fees from applying the principles in this consultation to aeronautical VHF channels Channel bandwidth

8.33 kHz simplex £1650

25 kHz simplex £4950

1.25 The reference rates which Ofcom currently considers appropriate for radar bands are as follows. Please note that these are not proposed rates per licence:

Figure 5 Initial view on reference rates for a national allocation of 1 MHz in radar bands Band Reference rate for 1 MHz of

national spectrum Aeronautical secondary surveillance radar (1030/1090 MHz)

£126,000 L band radar (1215-1350 MHz) £126,000

S band radar (2700-3100 MHz) £126,000

X band radar (9000-9500 MHz) £17,000

Actual assignments are not national, and licence fees, once apportioned, will reflect the geographic impact and bandwidth use of each installation.

1.26 The reference rates which Ofcom currently considers appropriate for bands used by aeronautical navigation aids are as follows. Once again, please note that these are not proposed rates per licence:


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Figure 6 Initial view on reference rates for a national allocation of 1 MHz in aeronautical navigation aids bands

Band Reference rate for 1 MHz of national spectrum

Microwave Landing Systems (“MLS”) (5000-5250 MHz) £32,000

Instrument Landing Systems (“ILS”) 108-112 MHz; 328.6-335.4 MHz)

£115,000

VHF Omni directional Range stations (“VOR”) (108-117.975 MHz) £115,000

Distance Measuring Equipment (“DME”) (960-1215 MHz) £126,000

Airborne weather radar (5350-5470 MHz) £32,000

Airborne radio altimeters (4200-4400 MHz) £32,000

Airborne Doppler Radionavigation aids (13.25-13.40 GHz) £19,000

Actual assignments are not national, and licence fees once apportioned will reflect the geographic impact and bandwidth use. of each installation.

1.27 Given that a large amount of spectrum in these bands is unused, the total payable by all licensed users in each band would be significantly less than the rate per MHz multiplied by the width of the band in MHz.

Next steps

1.28 Ofcom is inviting interested parties to comment on the approach outlined in this document by 30 October 2008. After reviewing these comments Ofcom expects to publish a detailed set of proposals for consultation later in 2008. Where those proposals include new licence fees – as we currently expect for VHF radiocommunications – we will publish our assessment of the likely impact of those fees, also for consultation. After considering comments on those detailed proposals Ofcom will publish a concluding statement setting out reference rates per 1 MHz of national spectrum used for radar and aeronautical radionavigation aids, and draft regulations in respect of licence fees for aeronautical and maritime VHF channels.

1.29 It is Ofcom’s current view that fees for aeronautical and maritime VHF channels could be applied in 2009. Where it can reasonably be expected that fees, if implemented at full opportunity cost levels in 2009, would cause significant effects in existing budgets, Ofcom would expect to agree transitional arrangements for the fees concerned, having undertaken the Impact Assessment planned for later this year and considered stakeholder responses to this consultation.

1.30 Ofcom will therefore take full account of any effects of these proposals on the sectors using these spectrum bands before making any decisions on fees. Ofcom looks forward to working closely with the relevant sectors as these proposals are further considered and developed.

This consultation document

1.31 The remainder of this document sets out


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• Section 2 - Introduction & background, including the legal framework

• Section 3 - Ofcom’s objectives and approach in applying AIP

• Section 4 - Specific pricing proposals

• Annex 1 – Responding to this consultation

• Annex 2 – Ofcom’s consultation principles

• Annex 3 – Consultation Response Cover Sheet

• Annex 4 - Summary of consultation questions

• Annex 5 – How we will assess the impact of any fees

• Annex 6 - Ofcom responses to issues previously raised by stakeholders

• Annex 6 – Maritime VHF channel density

• Annex 7 – Worked example applying channel density and coverage framework to maritime VHF licences


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Section 2

2 Introduction and background 2.1 Radio spectrum is a vital resource and a major asset of the UK economy. One of

Ofcom’s primary statutory duties is to ensure the optimal use of the radio spectrum in the interests of citizens and consumers. It is essential that the regulatory regime for the allocation of spectrum is able to respond to changes in the demand for and use of spectrum in the UK. Ofcom’s strategy for meeting this objective was set out in the Spectrum Framework Review6, which was published in November 2004.

2.2 That Review’s central theme was that the management of the radio spectrum can be carried out most effectively if market forces are harnessed to a much greater degree than in the past. Ofcom considers that this approach will:

• promote efficient use of the radio spectrum by allowing spectrum to be transferred to, and used by, the users who value it most highly;

• promote competition by increasing the availability of spectrum for use by the most valuable services.

2.3 Ofcom’s vision for spectrum management, as set out in the Spectrum Framework Review, is therefore for market forces to play an increasingly important role in determining how spectrum is used. Ofcom believes that this will encourage efficiency in spectrum use, by increasing the likelihood that spectrum will be held by those who can make best use of it, and by creating more freedom for spectrum to be used for more valuable applications. Administered Incentive Pricing (“AIP”) is one of the key tools which Ofcom uses to promote this, by creating incentives for users, and potential users, to take decisions which contribute to efficient spectrum use.

2.4 AIP-based fees are already paid by most private sector users of spectrum, except where upfront fees have been set at auction. Many public sector users, including the MOD and the emergency services, also pay AIP.

2.5 This consultation considers spectrum use by the civil maritime and civil aeronautical sectors. Together these are among the biggest spectrum users in the UK, using around 7% of all UK spectrum below 15 GHz to support a wide range of applications, often safety critical. This consultation follows a study (the Cave Audit), commissioned by the Government and led by Professor Martin Cave, which aimed to identify actions by Ofcom and/or the Government that could lead to release of spectrum to the market and an increase in opportunities for the development of innovative new services.

2.6 The Cave Audit was completed in December 2005, and recommended a wide range of changes to several areas of spectrum management including the Aeronautical and Maritime sectors. The report focused primarily on public sector holdings, which account for roughly half of the total spectrum in bands that the Audit investigated (bands below 15GHz). For the purposes of the Audit, the report also included civil aeronautical and maritime use, even though these are predominantly used by private sector organisations and individuals. Many civil aeronautical and maritime

6 See http://www.ofcom.org.uk/consult/condocs/sfr/


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uses occur in bands adjacent to, or shared with, military use; and these uses are often subject to prescriptive sectoral regulation because of the strong public policy interest in the safety of their operations. The report considered the following uses of spectrum: defence; aeronautical (civil and military); maritime; science services; emergency and public safety services.

2.7 The Government, in its response to the report, published on 22 March 2006, agreed to the wider application of market mechanisms. It set out a range of new actions by the public sector, including actively seeking spectrum efficiency opportunities and exploiting these either to extract more value for the existing users or to trade spectrum to other spectrum users. It also recommended the wider and more consistent use of AIP and spectrum trading.

2.8 Before introducing AIP to any sector or licence class, Ofcom needs to consider the specific circumstances of existing and potential alternative spectrum use to ensure that AIP has the desired impact in increasing efficiency. In the case of aeronautical and maritime transport holdings the DfT, MCA and CAA are key contributors to the process. We believe that they, as well as spectrum users, should be closely consulted in the process of deciding how fees should be set, even though the final decisions must rest with Ofcom. Ofcom welcomes views on possible institutional arrangements for managing this process.

Question 1: How should Ofcom manage the process of taking advice from users, regulators and government on efficient apportionment of AIP fees in the maritime and aeronautical sectors? Are any new institutional arrangements needed?

Legislative framework for spectrum pricing

2.9 Ofcom has a general duty in section 3 of the Communications Act 2003 (the “2003 Act”) to secure optimal use of the radio spectrum taking account of the interests of all who wish to access it.

2.10 Under section 13(2) of the Wireless Telegraphy Act 2006 (“the 2006 Act”), Ofcom may, if it thinks fit in the light of its duties under section 154 of the 2003 Act, prescribe fees which would be greater than those that would be necessary for the purposes of recovering costs it incurs in connection with its spectrum management functions. In particular, pursuant to section 154, Ofcom may have regard to the desirability of promoting:

• the efficient management and use of the part of the electro-magnetic spectrum available for wireless telegraphy;

• the economic and other benefits that may arise from the use of wireless telegraphy;

• the development of innovative services; and

• competition in the provision of electronic communications services.

2.11 The above-mentioned enabling powers are exercisable by statutory instrument under section 12 of the 2006 Act.

2.12 The practice of setting fees above administrative cost has become known as Administered Incentive Pricing, or AIP. The WT Act provides that all WT Act licence


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fees must be prescribed in Licence Charges Regulations. AIP has been progressively rolled out since 1998 in a series of regulations7 and now covers the great majority of licence classes, as illustrated in the following chart.

Figure 7 Weighted use of spectrum below 3GHz

Pay AIP

Will pay AIP

Licence exempt

MOD

Broadcasting

Commercial fixed and mobile

Aeronautical and maritime

Emergency services

Science

Licence exempt

MOD

Broadcasting

Commercial fixed and mobile

Aeronautical and maritime

Emergency services

Science

Spectrum pricing – development of the general approach

2.13 Because spectrum is finite and because transmission by more than one user in the same part of the spectrum at the same time will generally result in interference, use of the spectrum for one purpose will generally impose costs on other users. In many cases, users require exclusive access to part of the spectrum in order to avoid interference8. There is then an opportunity cost to use of the spectrum for one purpose arising from the forgone value of the other uses which are prevented as a result.

2.14 All decisions affecting current and future spectrum use should be made with a full and accurate reflection of these opportunity costs if those decisions are to lead to the socially optimal allocation of resources in the short and long term. If the opportunity costs of spectrum use are ignored or discounted by those able to influence allocation decisions, socially sub-optimal decisions may be made. One of the best ways of ensuring that the opportunity costs of spectrum are fully and accurately reflected by decision makers is for those opportunity costs to be reflected in prices that have to be paid to hold spectrum.

7 The most recent consolidated regulations are the Wireless Telegraphy (Licence Charges) Regulations 2005 (SI 2005 No.1378) 8 Sharing may however be possible where devices are of sufficiently low power to remain below the relevant "noise floor".


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2.15 This is the principle behind Ofcom’s use of Administered Incentive Pricing – the charging of fees for holding spectrum that reflect the opportunity cost of holding that spectrum.

2.16 In the case of spectrum licences awarded following an auction, the price paid by the licensee can be considered to reflect the opportunity cost as no alternative user was prepared to pay more for the licence9. Where spectrum licences are tradable and freely traded in a liquid market, licensees may become more aware of the opportunity costs of their spectrum holdings, particularly where the licences are fully liberalised and can be used for the most valuable purposes.

2.17 In cases where spectrum holdings are obtained by means other than an auction our general approach is to apply AIP, to ensure that the person holding the spectrum faces the opportunity cost. By charging such fees, Ofcom seeks to ensure that the opportunity costs of holding spectrum are fully and accurately reflected by decision makers when decisions are made that could affect future spectrum use. These include not only decisions about the allocation, assignment and continued holding of spectrum, but also decisions about related matters, such as investment in R&D to develop technologies which are spectrally more efficient, and related expenditures on spectrum and other business costs. This has been the rationale behind the use of AIP since 1998.

The Smith NERA approach

2.18 The approach to valuing spectrum initially used by Ofcom and its predecessor the Radiocommunications Agency followed a model provided in 1996 by Smith Systems and NERA10 (“Smith NERA”). The Smith NERA approach was to use estimates of the marginal value of spectrum as proxies for the opportunity cost to a representative spectrum user in those bands where AIP fees were to be charged.

2.19 The opportunity cost represents the benefits forgone from assigning spectrum to one use instead of another. The rationale for adopting this as the basis of the licence fees is that spectrum will thereby be directed into the best (i.e. optimal) use. The Smith NERA approach takes the opportunity cost as the cost of the least cost alternative to using spectrum that would enable the same output to be produced. This could be achieved via an alternative technology, such as by moving to a less congested spectrum band or, in the case of fixed wireless links, using fibre cables.

2.20 Setting AIP fees equal to the cost of the least cost alternative means of delivery of the same output provides incentives for more efficient spectrum use within each spectrum band where the demand for spectrum is greater than the supply. Only those current users for whom the spectrum is worth more than the least cost alternative will want spectrum at that price. The other current users would have an incentive to hand spectrum back to the regulator or trade it in the market, and switch to the least cost alternative. Spectrum could then be redistributed to those users who valued it the most. This approach is a proxy for true opportunity costs, which also considers completely different alternative uses for the spectrum.

2.21 AIP was first used for Public Wireless Networks and for Private Business Radio and introduced in step changes from 1998 to 2002. In 1999 it was extended to Fixed Links and to other mobile uses and by 2003 most licence class fees had been set

9 This outcome may, however, depend on the terms of the auction (for example, whether it is use specific) 10 'Study into the Use of Spectrum Pricing', NERA and Smith System Engineering Limited, April 1996


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to take account of spectrum management objectives using AIP rather than administrative cost. Spectrum used by the aeronautical and maritime sectors, and that used for digital terrestrial TV and radio broadcasting, are now very much exceptions in not attracting AIP fees at present. Ofcom stated its intention to apply AIP to spectrum used for digital terrestrial TV and radio broadcasting from 2014, in its 2007 statement Future pricing of digital terrestrial broadcasting11.

2002 Cave Review

2.22 After the first phase of applying AIP, during which the fees set tended to be

approximately 50% of the opportunity cost values derived by the Smith NERA approach, the Government commissioned an independent review of spectrum management. This review was undertaken by a team led by Professor Martin Cave who reported on 6 March 200212. The report recommended that greater use should be made of auctions and pricing, and, in particular, recommended that:

• AIP should be applied at more realistic levels and more comprehensively across spectrum uses;

• where AIP had already been implemented and there was, nevertheless, continuing evidence of spectrum shortages, prices should be set at full opportunity cost levels.

2.23 The Government published its response in October 2002, broadly agreeing with the findings of the report. On AIP, the Government concurred that the methodology for valuing spectrum and for setting fees should be reviewed, as recommended by Professor Cave.

Indepen report 2004

2.24 To update Smith NERA’s original spectrum valuation work, a study was commissioned in 2003 which was awarded by competitive tender to a consortium led by Indepen and included Aegis and Warwick Business School. The final report for this study was published on the Ofcom website in March 200413.

2.25 The Indepen team was asked to consider which types of spectrum use should attract AIP, to review and make recommendations about the methodology to be used, to provide illustrations of how the methodology could be applied, and to comment more widely on the use of pricing.

2.26 Indepen largely confirmed the validity of the original Smith NERA valuation approach. However, Indepen also widened the opportunity cost methodology, by recommending that the assessed value of spectrum should also reflect alternative uses in addition to the existing use in the spectrum band. Indepen's report recommended the application of AIP to an increasing range of spectrum uses, and provided a new set of illustrative values for setting AIP fees on this updated basis.

11 See “Future pricing of digital terrestrial broadcasting” published on 19/6/07 at http://www.ofcom.org.uk/consult/condocs/futurepricing/statement/statement.pdf 12 See http://www.ofcom.org.uk/static/archive/ra/spectrum-review/2002review/1_whole_job.pdf 13 'An economic study to review spectrum pricing', Indepen, Aegis Systems and Warwick Business School, February 2004, www.ofcom.org.uk/research/industry_market_research/m_i_index/spectrum_research/independent


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Cave Audit 2005

2.27 In 2004 the Government commissioned a review of major spectrum holdings from Professor Martin Cave. The review considered what action could be taken to release the maximum amount of spectrum to the market and increase opportunities for the development of innovative new services. One of Professor Cave’s key recommendations, set out in a wide ranging report published in December 2005 (the Cave Audit14), was that AIP should be extended to the civil aeronautical and maritime sectors where it has the potential to help increase the efficiency of spectrum use now or in the medium to long term.

2.28 As noted above, the Government, in its response to the report published on 22 March 200615, agreed that there is a strong case for introducing AIP to civil aeronautical spectrum where current use imposes an opportunity cost. The Government also reported that Ofcom had agreed that, subject to consultation, it would extend AIP to cover maritime radionavigation and communication systems, on a similar timescale as that proposed for introducing AIP for aeronautical services.

Indepen report 2007

2.29 In line with the Government’s response to the Cave Audit recommendations, in June 2006, Ofcom commissioned consultants Indepen and Aegis to consider how AIP might be applied to the aeronautical and maritime sectors. The consultants’ report16 was published by Ofcom in March 2007, without detailed comment from Ofcom. The approach adopted by Indepen and Aegis followed that set out in Indepen's 2004 report, in that the consultants recommended that AIP fees should be set with reference both to the marginal value of the existing use of the spectrum and the marginal value of the best alternative use.

Further consideration by Ofcom

2.30 Since then, in addition to engaging with DfT, the CAA and the MCA, we have held stakeholder workshops to explain the issues and seek feedback from interested parties.

2.31 In line with the recommendations of both Professor Cave and Indepen/Aegis, Ofcom intends to set AIP fees conservatively, initially towards the bottom of the opportunity cost range defined by the value of spectrum in existing uses and its value in alternative uses. AIP fees may then be adjusted towards emerging opportunity cost levels at regular review points, on the basis of market developments. AIP fees will therefore be set by reference to the long run opportunity cost value of the spectrum in any use, rather than being potentially defined by the existing use alone, in the way that would be anticipated to be signalled in a fully developed spectrum market.

2.32 As for all spectrum fees, any rates mentioned here are without prejudice to the outcome of later fee reviews, either in respect of specific bands or more general reviews of approach and methodology. As recommended by the Cave Audit,

14 See footnote 1 above 15 See footnote 3 above 16 See footnote 4 above


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Ofcom intends to conduct a thorough review of all AIP fees, the results of which will be consulted on during the course of 2009.


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Section 3

3 Ofcom’s objectives and approach in applying AIP

3.1 Ofcom’s primary purpose in applying AIP is to ensure that the holders of spectrum recognise the costs that they impose on society by holding spectrum, when taking decisions about spectrum use or when seeking to acquire additional spectrum. It is not our objective to achieve any specific change in the use of spectrum.

3.2 Indeed, we appreciate that many holders of spectrum are not in a position to make rapid changes to their use of spectrum in response to the application of AIP. The use of AIP is none the less justified by the benefits that should materialise in the longer term, as better decisions are made in light of increased awareness and appreciation of the value of spectrum – better decisions that should lead to more efficient use of the spectrum and economic resources more generally.

3.3 It is important to emphasise that Ofcom, in applying AIP or other market mechanisms, is not taking a view on what these decisions would be. We do not have in mind that any particular user, or group of users, should reduce their spectrum use, or allow sharing by other users, or change the frequencies they use in response to spectrum fees and payments. Our intention is, simply, but crucially, that they should take any such decision in light not only of the non-spectrum costs, and all the benefits, of a decision, but of the impact of the opportunity cost imposed on society, where this decision involves the use of scarce spectrum.

3.4 That is because we consider that Ofcom is not the best judge of the value that a use has to any sector or individual users. In the aeronautical and maritime sectors, users know how much value they individually place on the use of radiocommunications, and radionavigation, both in terms of their operational usefulness and their contribution to safety. The CAA and MCA likewise assess how valuable, or important, spectrum use is in terms of meeting their own objectives to secure safe operations, for operators, their passengers, the economy, and the public at large. Both users and regulators will be better placed to assess their need for spectrum, now and in future, if they have information about the opportunity cost of spectrum that they can consider alongside the benefits of use.

3.5 In the case of the aeronautical and maritime sectors, several factors mean that the CAA and MCA are necessarily very closely involved in many decisions affecting aeronautical and maritime operation. These include:

• the importance of interoperability within the UK and internationally;

• related to this, the need to agree many changes of use internationally;

• the existence of a large number of disparate users, which makes co-ordinating decisions costly and time-consuming; and

• crucially, the public interest in safe and sustainable operations, over and above any operator’s own interests in safety.

3.6 From the perspective of spectrum management, this means that not only the users, but the sectoral regulators, are the decision-makers when it comes to use, or


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changes to use, of spectrum. These decision makers, taken together, are much better placed than Ofcom to judge the value of any particular use. The CAA and the MCA are entrusted to safeguard the public interest not only in safety in their sectors, but in other aspects such as general efficiency and availability of services to the economy. They are therefore the best judges, alongside individual operators, as to whether a new use of spectrum, or changing an existing use, would be justified in terms of all of the consumer and citizen benefits potentially available from that decision.

3.7 Applying AIP is intended to ensure that any decisions taken in future, whether by individual users, users acting in co-ordination with one another, or by the regulators, take into account all of the benefits – commercial or otherwise – and all of the costs. Whether or not charging AIP has been effective must be judged not by whether users have changed those decisions but by whether the users, and in this case the public authorities with responsibility for some of the benefits of the use, are aware of the costs as well as the benefits of using spectrum.

Who might pay for this spectrum

3.8 AIP is usually applied directly to the WT Act licence holder or Crown user, as the direct user is often best able to respond to the price signals presented by AIP. Ofcom has legal powers to require WT Act licensees to pay AIP. The Crown enjoys immunity from the provisions of the WT Act and, therefore, has no need of licences and cannot be legally required to pay AIP fees. However, in its response to the Cave Audit, Government reiterated its commitment to public sector users of spectrum nevertheless paying AIP on a basis which is comparable to the basis on which AIP is paid by the private sector. It is Ofcom’s expectation, therefore, that Crown users will agree to pay comparable charges.

3.9 In the transport sector, most spectrum is used under licences granted to private sector users and some non-Crown public sector users. The MCA’s use of a small number of radars and other items of radiocommunications equipment is an exception. Our expectation is that the MCA would pay for these uses of spectrum on a basis comparable with other users.

3.10 Ofcom’s preference remains, in principle, for AIP to be applied to the user of the spectrum, be that a licensee or a Crown body. There is, however, a further option under which AIP could be paid by the Crown department which has responsibility for the sector, in this case the DfT, or by a sector regulator such as the CAA or the MCA.

3.11 This approach may be advantageous where spectrum needs to be reserved for future use by the sector, but there is currently no licensed user. To the extent that the DfT (or the CAA or the MCA) decides that this spectrum should remain reserved for the sector, it would seem appropriate for payments to be made, on a comparable basis to fees paid by the private sector, in respect of this exclusion of other uses. We consider that such an arrangement would fit with the principle that public sector spectrum should be paid for on the same basis as that licensed to the private sector, and we propose that Government consider this option.

3.12 A similar approach may also be advantageous where it is not practicable or efficient to charge individual users and where there is a body with policy responsibility that is, as a result, a key decision-maker about the use of the spectrum. In Ofcom’s view, these circumstances apply to an extent in parts of the civil aeronautical and maritime sectors. Ofcom is therefore proposing that Government consider the


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option of DfT making payments in respect of, or otherwise recognising the opportunity cost of, spectrum in airborne-only radionavigation uses.

3.13 The CAA currently manages civil aeronautical spectrum and issues licences under a contractual arrangement with Ofcom. As the CAA is the UK’s expert authority on civil aeronautical use of spectrum, and represents the UK at international fora where decisions are taken about spectrum needs in the sector, the option of the CAA rather than DfT facing some financial incentives to maximise efficiency in spectrum use appears attractive in principle. However, the CAA’s standing as a public corporation with powers defined by statute, may currently present practical obstacles to its paying for spectrum already licensed to users in its sector. Ofcom recommends that this option should be reviewed from time to time. The MCA is an executive agency of the DfT without a distinct legal identity, and so there is the option for Government, either the MCA or DfT, to pay in respect of the relevant spectrum.

3.14 If Government agrees that payments should be made, whether these are made by DfT or the MCA would be a matter for Government to decide.

3.15 As the final decision on whether the DfT, MCA or the CAA should make any payments for unused spectrum, or spectrum licensed to certain types of user, rest with the Government, not us, we are not formally consulting stakeholders on this issue. However we are noting our position here in the interest of providing full information for all stakeholders.

AIP policy

International agreements, opportunity cost, and constraints on changes to use of spectrum

3.16 The use of some aeronautical and maritime spectrum is harmonised by international treaties for specific, often safety critical, applications. Stakeholders have queried Ofcom’s position in relation to setting prices for bands such as these which are subject to international agreement. We hope it is useful to spell out our position here.

3.17 The Cave Review of March 2002 stated that “for some spectrum uses, though, the opportunity cost will be zero. This will occur where use of a particular band in the UK has been exclusively defined through international agreements and incumbents have no scope to change their spectrum use17”.

3.18 Ofcom agrees that there are cases where the specific provisions of an international agreement might mean that there is no efficiency gain to be generated by applying fees, at full or partial opportunity cost level, to licences. In such cases we would not propose to set AIP based licence fees. However, we do not consider that the existence of an international agreement exclusively defining the use of a band necessarily means that there is no opportunity cost associated with that use, nor that there is no efficiency case for pricing to reflect that opportunity cost.

How Ofcom defines the full opportunity cost of spectrum

3.19 A key question in defining opportunity cost is which alternative use is the relevant one for us to consider. This could be either:

17 Review of Radio Spectrum Management, March 2002, paragraph 66.


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• that which takes account of the effect of constraints introduced by regulatory policy (e.g. the fact that the spectrum is allocated on an exclusive basis) and thus considers only those alternative uses that can be accommodated within these constraints, or

• that which does not take account of these constraints, but considers all alternative uses that are technically feasible, ignoring constraints imposed by regulatory policy or international agreement.

3.20 In making this decision it is important to recognise that an understanding of the opportunity cost, or value, of spectrum is important for a wide range of Ofcom’s spectrum management activities, not simply, or even most importantly, in setting fees. Understanding the potential value in different bands of spectrum informs our decisions on:

• Prioritising bands for release by auction;

• Prioritising bands for liberalisation and trading;

• Working with Government on policy decisions, including in international fora, that may reserve spectrum exclusively for particular uses;

• Assessing whether spectrum in certain bands is not in the most efficient use and considering whether we should take specific steps, beyond enabling liberalisation and trading, to secure an improvement.

3.21 In taking these decisions, we (and Government as appropriate) need to understand the full economic potential of each band, that is the best use it might be put to if current restrictions were changed or lifted. We choose therefore to consider the second of the definitions of opportunity cost, which does not take account of any policy constraints when defining the long-run, application-neutral opportunity cost of spectrum.

3.22 We would also generally use this definition in relation to fees setting for a number of reasons, which include:

• the cost to society of the loss of the service excluded from the spectrum is not reduced or increased by virtue of the way the exclusion was brought about. Whether the alternative service is excluded simply because the existing user paid more for the spectrum at auction, or because there are laws or other undertakings preventing alternative uses of spectrum, the net effect for citizens and consumers is the same

• international constraints, like any other policy constraint, can ultimately be changed. They are not completely fixed and spectrum users, Ofcom and other policy makers including DfT should understand the impact of these decisions in order to understand the true cost of policy decisions, and to assess the potential benefits of changing these decisions

• concern that if we were to take account of these constraints in defining the opportunity cost and setting fee levels we would create an undesirable incentive for spectrum users to lobby international fora for exclusive allocations, with potential costs to society from the loss of excluded services, to gain access to spectrum at a lower rate than would apply otherwise


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• if different spectrum bands having similar technical characteristics were charged in radically different ways simply because some were allocated by decisions in international fora, users’ choices between these spectrum bands could be distorted leading to inefficient and sub-optimal use of spectrum.

3.23 It is nevertheless possible that for some frequency bands, the opportunity cost could be zero. There might not be any alternative users who could use the frequencies, even if the international agreement was not in place, or the band could be in a part of the spectrum where all foreseeable demand for spectrum is already easily accommodated, so that current or proposed sector use does not deny spectrum to others. For this second reason, this consultation exercise is not considering bands below 75 MHz or above 15 GHz, although Ofcom may review some of these bands at a later date.

3.24 However, in those cases where there is an observed opportunity cost, the precise nature of the international obligation is still relevant to whether setting fees is appropriate. We need to consider the potential for fees to encourage more efficient spectrum use decisions by existing users.

International agreements excluding other uses of the spectrum

3.25 International agreements can affect either regulatory authorities, or individual users in a sector, or both. Internationally conferred exclusive rights constrain the ability of national spectrum authorities (in the UK, Ofcom) to permit other uses in the relevant bands. Such exclusions deny access to spectrum for potential alternative uses. The opportunity cost to society of keeping these alternative users out of the spectrum is the value of the services they might provide, taking into account the existence and availability of alternative frequencies they might use instead.

3.26 Whether other uses are excluded under domestic regulation only (eg a licence or RSA from Ofcom) or under domestic and international regulations (eg a licence or RSA from Ofcom, and a prior international agreement defining the spectrum as solely usable by the sector), does not change the effect of the exclusion on citizens and consumers. One use has access to spectrum to the exclusion of others.

3.27 Changing international exclusive allocations can often be a very slow process, and neither UK authorities nor their affected stakeholders can impose change unilaterally. However, deciding not to set fees in the UK on these grounds would reduce or eliminate incentives on national sectoral regulators (in this case, the CAA and/or the DfT) to consider the case for pursuing such changes, with potentially distorting outcomes at the international level.

3.28 Many international decisions allocating spectrum exclusively do not require the appointed use or user to use all of the available spectrum in each country, all the time. In such cases, there is potential for efficiency gains from setting a licence fee that will improve the information for users in deciding how much spectrum they want, either at the time of application or subsequently. In the absence of either an active spectrum market or a charge for holding spectrum, there would be no incentive to use spectrum efficiently and reduce excessive holdings, either through sharing or outright trades of the spectrum that is not needed.

3.29 There is a further point to consider in deciding whether to set fees for spectrum that has been guaranteed exclusively to a particular use by international agreement. In some cases, the service that is provided, could instead be provided, and in some


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cases already is provided, using other spectrum that was not included in the international allocation.

3.30 For example, in the case of maritime VHF radiocommunications use, some channels were allocated by international agreement and further channels have been allocated at the UK level. The international channels are currently more congested than the UK channels. Ideally, ground station users would decide which channels they want by reference to availability in their area, coverage, the needs of the mobile users with whom they wish to communicate (including, in time and if relevant, any potential flexibility on channel width), the cost of equipment, and other aspects related to the assignments including any fee. If the international channels were free, users might prefer to use these channels notwithstanding other aspects. As the international channels are already more heavily congested, such a price differential could potentially inhibit movement towards the most efficient use of the channels overall.

3.31 If there is potential for pricing to improve the likelihood that users and potential users will make efficient decisions, increasing benefits to citizens and consumers, we then need to decide the appropriate fee level to charge. Such a decision would take the observed opportunity cost as a reference point, but would also take into account the likely impact of any fee on the licensees and their customers.

International agreements obliging operators to use certain spectrum, or constraining how they use it

3.32 Some obligations constrain the flexibility of users to change their use. There are certain internationally agreed regulations which oblige operators to use certain spectrum bands, and in some cases to use specified technologies.

3.33 International obligations tend to limit the autonomy of the UK government (for example, the UK could not decide to amend or reduce the extent of the obligation), but their impact on spectrum users is similar in effect to UK regulation. The UK’s regulatory authorities, such as the Health and Safety Executive, the Driver and Vehicle Licensing Agency, the Financial Services Authority and Ofcom itself, all require businesses and individuals in their sectors to comply with a range of obligations, many of which impose significant costs on businesses affected.

3.34 The existence of domestic or international requirements to use spectrum will limit any licensee’s ability to make changes to his use, in the short term and possibly even the medium term. However, as we have stated previously, Ofcom’s primary purpose in applying AIP is not, in general, to achieve any specific short-term changes in the use of spectrum. We fully appreciate that many holders of spectrum are not in a position to make rapid changes to their use of spectrum in response to the application of AIP, but note that in practically every case the holders of spectrum have opportunities to change their use of spectrum in the longer term, albeit in some cases the longer term may be many years away, while still within the time horizons against which transport infrastructure decisions must often be justified.

3.35 Obligations constraining the ability of individual users to change their spectrum use in the short term are relevant to considering the impact of fees, as they can limit users’ short-term flexibility to respond. However they do not eliminate all flexibility: depending on each user’s circumstances, spectrum costs like any other costs may be passed on in whole or in part, or absorbed by reducing expenditure on other


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inputs. Before proposing any significant fee changes, Ofcom would conduct an impact assessment and consider the potential effects of the fees it proposed.

3.36 In the case of domestic regulations mandating spectrum use, the cost of spectrum is a relevant cost that should be taken into account in assessing the impact of the regulation, along with the cost of equipment, staff and resources to use that spectrum. If that cost is transparent, in the form of a known spectrum price, then spectrum users and the regulators who create the obligations have better information to assess whether a particular requirement is justified by the benefits it is expected to secure.

3.37 This applies similarly, although almost always more slowly, to obligations imposed by international fora. While the UK is only one member of the international organisations setting such requirements, like all other member states it should assess any requirement in light of the resulting costs.

3.38 Neither UK authorities nor their affected stakeholders can impose change unilaterally. However, deciding not to set fees in the UK on these grounds would itself create distortions to future UK decisions, with potentially distorting outcomes at the international level.

3.39 If we ruled out pricing for any spectrum that users were required to use under international obligations, that would reduce incentives on the relevant UK authority, and potentially remove any incentives for their stakeholders, to consider whether a new or existing obligation was proportionate. It could potentially create circumstances where two licensees, offering similar or substitutable services to consumers, had different spectrum costs not because of any difference in the opportunity cost of their use, but because one licensee could point to an international obligation to use spectrum.

3.40 The option of setting no fee, or an administrative cost fee, would have no incentive benefits at all, for users or their regulators, although the opportunity costs – the value of the services denied to UK consumers and citizens by existing use – would continue to be the same.

International agreements guaranteeing access to spectrum to any operator from any signatory country

3.41 In the maritime and aeronautical sectors, there are very specific agreements under which mobile operators – ships and aircraft – are entitled to use certain spectrum bands in (or over) any country in the world that has signed up to those agreements. This is important to enable free movement and access to markets.

3.42 Spectrum affected by these agreements must be kept clear for the specified uses. This requirement would not be affected by decisions by individual operators in the UK, nor if either sector acted together to reduce its use of the relevant band. That is, even if every UK aeronautical or maritime operator ceased to use these bands, it would not be possible, under these agreements, to permit another use that could potentially interfere with international aeronautical or maritime use.

3.43 In the case of such spectrum used by ground stations as well as mobile (ship and aircraft) users, there is potential for pricing ground station licences to incentivise efficient decisions about, for example, an individual station’s requirement for VHF radiocommunications channels, and what channels that station makes available to aircraft or ship users communicating with that station. So pricing may lead to the


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spectrum being used by the highest value use, as a result of decisions taken by ground station users. Where spectrum use at the ground station is reduced, for example by using narrower channels, it may be possible to accommodate more aeronautical or maritime users, or more use by other users, such as business radio.

3.44 However, in our assessment, where bands are not used by UK ground stations there is unlikely to be any material efficiency benefit to be gained from setting prices for UK mobile users in the sector, for as long as these international agreements remain unchanged. As a result, we are not proposing to set prices for mobile aircraft radio licences. (Our decision not to price ship radio licences was confirmed in 2006 and has been taken as read in considering our current proposals.)

3.45 As with all other international agreements, there is over the long term potential for these spectrum allocations to change. We therefore consider that there might be benefits from DfT recognising the opportunity cost of these reservations of spectrum, in order to inform its decisions in preparation for any future negotiations which might increase or change them.

Impact of AIP fees on safety

Providers of safety critical services generally have to acquire inputs on the open market

3.46 Much of the spectrum considered in this consultation document is currently used to provide safety critical applications. It is essential, therefore, that the introduction of AIP does not disrupt the operation of these services. The aeronautical and maritime sectors already have to purchase, on the commercial market, most of the other resources needed to support safety critical facilities, including ground based and airborne and seaborne radar, communications and other radionavigation equipment. Spectrum is an exception.

3.47 Ofcom does not believe that market disciplines in themselves threaten the future of safety critical facilities. Industry usually has a legal duty to provide such facilities, stemming either from general health and safety legislation or from prescriptive sector specific obligations. The cost of supporting safety critical services will generally be passed on to customers or, where this is not feasible or desirable from the perspective of sector regulators and funders, subsidised by charities or Government.

3.48 To the extent that there are policy objectives that Ofcom has a duty to achieve or the Government wishes to achieve, it does not necessarily follow that the best way to achieve such objectives is to give users access to spectrum on preferential terms. If implementing these policy objectives affects the opportunity cost of the spectrum that is used as a result, the most efficient way to address this is via a subsidy which is raised in the least distortionary manner (usually through general taxation). It is broadly accepted18 that where some form of subsidy is required it is more efficient to subsidise the service rather than one or more of the inputs, such as spectrum. Subsidies on specific inputs generally distort decision making, encouraging

18 For example see Peter Diamond and James Mirrlees. 1971. "Optimal taxation and public production 1: Production efficiency and 2: tax rules". American Economic Review, Volume 61. Available at http://www.jstor.org/pss/1813425


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providers to use the subsidised input even where a more efficient alternative (absent subsidies) is available.

Ports generally have specific legal duties concerning safety

3.49 Almost all ports are statutory undertakings with individual and specific legal duties to have regard to considerations of safety. The nature of these duties is summarised in the Port Marine Safety Code19 which is intended to help ports meet their statutory duties. While compliance with the Code itself is not mandatory, failure to act in accordance with the code is likely to expose port authorities to legal claims under wider health and safety legislation and/or breach of statutory duties.

Airports and providers of air traffic and air navigation services are subject to prescriptive regulation and would be in breach of sector specific licence obligations if they failed to make effective provision for safety

3.50 The aeronautical sector is regulated by the CAA which rigorously applies the provisions of the Air Navigation Order20. As a result, the sector does not have the legal option to compromise safety in response to a material increase in spectrum costs, or indeed other unavoidable costs such as aviation fuel or landside security, even in the unlikely event that operators viewed such a response as a commercially viable route. Ofcom does not believe that use of spectrum dependent equipment, including VHF radiocommunications systems, radar and other radionavigation aids, could be reduced to an unacceptable level without the relevant airports or providers of air traffic and air navigation services placing themselves in breach of their legal duties.

Question 2: If you consider that our proposals for pricing ground station users for any spectrum would be likely to have a detrimental impact on safety, please let us know. In order for us to understand your assessment fully, it would be helpful if you could outline the mechanisms whereby this might happen.

Impact of AIP on users’ competitive position

3.51 Some concern has been raised by industry that, where charges are passed on to customers of ports and airports, these facilities will suffer a competitive disadvantage compared with foreign ports and airports which do not face AIP fees. Ofcom understands, however, that much of the business conducted by UK ports and airports does not face direct foreign competition; users are not able to switch their business to non UK ports and airports.

3.52 Ofcom recognises that competition for some business does have a significant international dimension, particularly business involving the use of containerised ports for onward distribution and the use of airports as passenger hubs. It is Ofcom’s current view, however, that the scale of these businesses is sufficiently large that AIP-based licence fees, passed on through service charges, are very unlikely to have an adverse effect on their ability to compete. In reaching this view in respect of maritime ports Ofcom has also had regard to the study of the economic effect of Light dues commissioned by DfT21. We will re-assess this view,

19 See http://www.dft.gov.uk/pgr/shippingports/ports/pmsc/ 20 See http://www.uk-legislation.hmso.gov.uk/si/si2005/20051970.htm#sch5 21 “Study of economic effect of Light dues” commissioned by DfT from consultants MDS Transmodal in 2003 - see http://www.dft.gov.uk/pgr/shippingports/ports/studyofeconomiceffectoflightdues


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in the context of assessing ground stations’ options in responding to spectrum pricing, in light of all the evidence available to us, before proposing any fees.

3.53 Ofcom would welcome any references respondents may provide to relevant literature which has considered these issues in the context of airports. Ofcom will consider this, and the views of stakeholders on these questions, before setting out an Impact Assessment for consultation. More explanation of the information we will wish to take into account in our Impact Assessment is at Annex 5.

Question 3: Do you have any evidence which indicates that AIP charged to ground stations could have a material detrimental impact on UK competitiveness?

Approach to fee setting

3.54 In deriving proposed opportunity costs for VHF radiocommunications licences, and proposed reference rates per 1 MHz of national spectrum used by radar and other radionavigation aids, Ofcom has had regard to a wide variety of information sources and principles. We have reached our current position having taken these sources and principles into account.

3.55 The key factors which Ofcom will in principle take into account in assessing opportunity cost in order to derive AIP-based fees are as follows;

• The asymmetric risks of regulatory failure in setting fees at the wrong level

• Any relevant analysis of least cost alternatives to using the spectrum in question (in this case, work carried out by Indepen)

• Consistency with the approach to setting fees in other bands

• The outcome of auctions and trades

3.56 These factors are discussed in turn below. Our conclusions with respect to specific bands are set out in section 4 below.

Asymmetric risks

3.57 In determining the level of AIP fees, it is not possible to identify the optimum with any great precision given the feasibly available data. Demand for spectrum is difficult to quantify and, as noted in Section 2 above, fees have only relatively recently been introduced to reflect AIP principles in a number of areas. Ofcom recognises that there are risks to setting AIP too high or too low relative to the true underlying opportunity cost of spectrum.

3.58 If AIP is set too high, this could deter providers from using the spectrum, leaving it unutilised. Alternatively, if AIP rates are set too low, this could give existing operators insufficient incentives to move to other frequency bands (or to become more efficient). However, Ofcom considers that the outcome of setting prices too high results in a far greater loss of economic efficiency, as this could result in market exit/forgone entry by users and services being withdrawn.


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3.59 Accordingly, Ofcom considers that when setting AIP, the rate should be set conservatively to minimise the risk of spectrum being left unutilised. Ofcom recognises that this approach may mean that fees initially tend to be set below the optimum level, reducing their impact. Ofcom will continue to review the impact on demand, and we will seek to move AIP levels closer to our best estimate of the opportunity cost, over time, in line with the recommendations of the 2002 Cave Review22.

Indepen’s analysis of least cost alternatives to using the spectrum in question

3.60 In June 2006, Ofcom commissioned consultants Indepen and Aegis to recommend how AIP might be extended to spectrum used by the civil aeronautical and maritime sectors. The consultants presented their report in 2007, and this was published by Ofcom to enable stakeholders to consider the independent views expressed. Ofcom has assessed the report and broadly considers the methodology and conclusions are robust and reasonable. We have also considered the comments of stakeholders on that report, and have responded to these in Annex 6 below.

3.61 In recommending reference rates per 1MHz of national spectrum, Indepen considered the change in input costs that would occur if an average existing user was denied access to a small amount of spectrum. As Indepen noted, the additional costs would depend on the application but might include costs associated with deploying alternative technology, investing in more network infrastructure, using narrower bandwidth equipment, switching to a different bandwidth or switching to an entirely different service. This approach is often referred to as the “least cost alternative” approach.

3.62 Indepen considered the least cost alternative in respect of the current service application and in respect of the best alternative application, and then selected a fee rate at the midpoint between the two opportunity cost estimates. For example, in the case of L band and S band radar spectrum, Indepen considered that there was no scarcity of spectrum in current radar use (and hence a zero valuation in existing use), but that there could be scarcity in the alternative future “mobile” use of that spectrum. Indepen derived the equilibrium price by applying the Smith-NERA methodology (described above in 2.18-2.21) to calculate the value of the spectrum in the alternative use (mobile communications), and hypothesising that the equilibrium price would be halfway between this and the zero marginal value in radar. Finally, Indepen further discounted this estimate to reflect levels of uncertainty and risk of regulatory failure.

3.63 The authors of the report had been closely involved over many years in providing advice on AIP to Ofcom and its predecessor the Radiocommunications Agency. The methodology and cost assumptions in the report published in 2007 were based closely on earlier work carried out by these advisers for Ofcom and the RA including, in particular, assessments of marginal value in a variety of alternative applications. In some cases, Ofcom and the RA had previously chosen to depart from the recommendations of these consultants when setting licence fees in other bands, and have discounted substantially the recommended fee levels, in order to apply the principle of setting prices conservatively as identified above. This is relevant to the present consultation exercise in so far as the recommendations made by Indepen in 2007 are based on their own earlier assessments of marginal

22 Review of Radio Spectrum Management, 2002 http://www.ofcom.org.uk/static/archive/ra/spectrum-review/2002review/1_whole_job.pdf


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value in the current or alternative use (opportunity cost), rather than on the fees actually set by Ofcom.

3.64 As further discussed in paragraphs 3.60 to 3.70 below, it is Ofcom’s view that fee levels in different bands should, where possible, be determined on an internally consistent basis, although the legacy bases for setting fees in different bands may create limits to achieving this objective in the shorter term. In the case of L band primary radar (1215-1350 MHz), S band primary radar (2700-3100 MHz) and secondary surveillance radar and DME in the band 960-1215 MHz, Indepen assumed that the best alternative use was public mobile radio, and adopted a marginal benefit estimate in this alternative use of £840k per year per 1 MHz of national spectrum. As noted by Indepen in 2007, this was the valuation set out in their report for Ofcom in 2004, which in turn was built on a series of reports for Ofcom and the RA dating back as far as 1996 and work undertaken by many of the same people then working for consultants Smith and NERA. This assumed value in alternative mobile use influenced the level of the reference rates recommended by Indepen in 2007 to apply to the radar and DME bands.

3.65 Although Ofcom considers that the opportunity cost methodology deployed by Indepen and its predecessors was sound, when actually setting fees for providers of public mobile radio operating at 900MHz and 1800MHz Ofcom adopted fee levels that were approximately half those fee levels recommended by Smith and NERA and their successors. Consistency may, therefore, suggest that in assessing the marginal value in this alternative use (alternative to L band and S band primary radar and secondary surveillance radar and DME in the band 960-1215), Ofcom should similarly take some account of the AIP fees actually paid in that alternative use, as distinct from the marginal value of £840k per 1 MHz of national spectrum recommended by Ofcom’s advisers, at least until such time as AIP relativities are more fundamentally reviewed, and AIP in the GSM bands is reviewed in the context of their potential liberalised use in future.

3.66 In the light of the above, Ofcom considers that it should not set AIP for “mobile” spectrum currently allocated for aeronautical and maritime use at a level above the AIP levels in the GSM bands, and that it should probably be some way below this. This is in order to avoid the risk of prices which are set too high causing spectrum to be left unutilised. Ofcom notes that the rates recommended by Indepen in 2007 already lie somewhat below GSM band AIP levels at both 900MHz and 1800MHz (although at 1800MHz the values are broadly similar). However, it is not clear that they are sufficiently far below the AIP fee levels in the GSM bands to take account of all the relevant factors. These factors include:

• the physical properties of the spectrum, as reflected in an application neutral approach to opportunity cost estimation,

• the non-harmonisation of these bands at international level for alternative mobile use which may make them relatively less valuable in alternative uses; and

• the zero marginal value in the current use.

3.67 Similar issues of consistency – between Indepen’s assessment of marginal value in alternative use on the one hand, and the assumptions underpinning AIP fees actually brought into force on the other – also arise in many other bands. For example, current licence fees for “Medium popular” Business Radio bands are


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based on a value per 1MHz of national spectrum (£330k23) that is approximately half the reference rate of £620k per 1 MHz of national spectrum determined by Indepen in 2004 and relied on by Indepen in 2007 when deriving recommended reference rates for VHF radiocommunications channels and ILS (for which the best alternative use was assumed to be Private Mobile Radio). Similarly, the reference rate underpinning current AIP fees for Fixed Links24 is 25% below the reference rate per link (£132) recommended by Indepen in 2004, and adopted in its equivalent rate per 1 MHz of national spectrum25 as the marginal value in best alternative use for maritime and aeronautical bands from 4200 to 15700 MHz.

3.68 Ofcom has taken into account these factors, in line with previous practice, when deriving proposed opportunity costs as set out in Section 4 below. In all cases, we have arrived at reference rates which are significantly lower than those recommended by Indepen.

Consistency with the approach to setting fees in other bands

3.69 As spectrum liberalisation and trading26 is progressively extended, it will become even more important to ensure that AIP fees complement and incentivise, and do not distort, the efficient operation of that developing market. In principle, AIP fees should increasingly be derived to reflect opportunity costs on an application and technology neutral basis, mirroring the approach now being adopted when licensing spectrum use. To the extent that fees in distinct bands have in the past been derived on an application-specific basis, there is a risk that, as spectrum is liberalised and traded, similar applications relying on different bands will face different fees and, therefore, different incentives to trade that are not reflective of underlying opportunity costs. We recognise the disadvantages of this outcome, and hence the desirability of moving towards fee levels that are more consistently reflective of opportunity costs on the same basis over time.

3.70 To counter these risks, Ofcom will therefore continue to review both the absolute level and relative level of AIP fees and adjust these in light of market developments, moving fees closer to application neutral opportunity cost. A major strategic review for this purpose is planned to start later this year, although in practice the review and adjustment of AIP levels in individual bands will be an ongoing activity in the longer term as the market evolves.

3.71 The Cave Audit also recommended that Ofcom should review the “cliff edge” distinction between AIP set for spectrum suitable for mobile applications and that suitable for fixed applications, noting that this may not reflect the potential for alternative uses. The Audit underlined that there is a moving boundary of the technological and commercial feasibility of different services, and that the historic approach of classifying bands by their fixed or mobile use would in future be inconsistent with Ofcom’s move towards technological and service neutrality in licensing.

23 A rate of £8250 per 2 X 12.5 kHz national channels translates to £330k per single 1 MHz national channel. See table 6 of Ofcom’s statement Modifications to spectrum pricing at http://www.ofcom.org.uk/consult/condocs/pricing06/statement/statement.pdf 24 The comparable Ofcom reference rate was £99 per link, although this was further reduced to £88 per link to reflect a decision to remove from the pricing algorithm the antenna factor and the sharing factor. See section 3 of Ofcom’s statement Spectrum Pricing at http://www.ofcom.org.uk/consult/condocs/spec_pricing/statement/statement.pdf 25 Indepen 2007 relied on an assumed marginal benefit for fixed links of £85k per single national 1 MHz channel, which was derived from the assessment of £132 per link set out in Indepen 2004. 26 See Ofcom’s Spectrum Framework Review cited at footnote 9 above


33

3.72 As noted above, and underlined in the Cave Audit, Ofcom will consider the scope for moving further towards a more generic per MHz pricing system which reflects the spectrum value curve and physical properties of the spectrum at different frequencies in various applications. We envisage that this transition may require a fundamental re-evaluation of the basis on which some existing bands, where administered fees are charged, are priced. However, we do not expect the results of any major strategic re-evaluation of pricing principles to translate to any new pricing algorithms for individual fees until at least 2010. For this reason, we do not propose to delay the first steps of extending AIP to the maritime and aeronautical sectors pending that wider review.

3.73 In deriving our indicative consultation proposals for these sectors we have, however, considered the propagation characteristics of the wide range of spectrum bands used by the sectors, principally by considering free space propagation, diffraction loss, absorption through buildings, antenna efficiency (which affects both base stations and use devices) and interference management. The value curves implied by this technical analysis can be used to inform an application-neutral approach to reference rate determination.

3.74 The values implied by the physics alone do not, however, take into account practical commercial considerations such as actual spectrum availability and levels of industry harmonisation.

3.75 To illustrate this point, where demand for 2G mobile services is high (i.e. where spectrum is capacity constrained) mobile network operators in the GSM bands (whether operating at 900 or 1800MHz) must invest in multiple cells in order to cover a given percentage of the population and maintain service levels. As a consequence, the theoretical cost advantage of operating at 900MHz (due to its superior propagation characteristics) is likely to be less pronounced in reality as network investments will tend towards many cells in areas of high service demand, regardless of the frequency they operate at.

3.76 For 3G networks, the advantages of lower frequencies are more pronounced. Hence operators operating at 900MHz could have a clearer cost advantage over those using higher frequencies.

3.77 Consistency with the approach adopted with 2G spectrum uses might, therefore, suggest that opportunity costs in higher frequency bands would systematically reduce to reflect the broad outline of a physics based value curve. This would suggest that the S-band spectrum should attract a lower fee than both the existing 2G spectrum and the L-band and Distance Measuring Equipment (“DME”) spectrum. However, there are risks of creating transitional inconsistencies and discontinuities, particularly where existing fees have been set on the basis of historic service applications rather than underlying opportunity costs assessed on a technology- and application-neutral basis.

3.78 In the case of L band primary radar (1215-1350 MHz), S band primary radar (2700-3100 MHz) and secondary surveillance radar and Distance Measuring Equipment (DME) in the band 960-1215 MHz, we consider that it would be premature to identify different reference rates for these three bands at this time given that we will be considering the generic question of how value may vary with frequency within our strategic review. These relativities will determine the direct incentives to change use (including moving frequency between these bands), and pending greater understanding of the relative opportunity costs concerned, we consider that


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a precautionary approach is to defer the identification of specific relativities at this stage.

3.79 A further point to consider when considering consistency with rates currently applicable in comparable bands, is the existence, or otherwise, of harmonisation agreements. Indepen’s rates for L band and S band primary radar and secondary surveillance radar and DME are derived in part from their estimates of opportunity costs of spectrum for 2G mobile use. Accordingly these rates are likely to overestimate the alternative use value of spectrum currently allocated to radar because this spectrum is not presently harmonised for mobile use across other European jurisdictions, and therefore its value to a provider of public mobile services may be significantly less than that suggested by the AIP levels set for 900 and 1800MHz.

3.80 Providers of public mobile services will be less likely to value spectrum, all else being equal, where these frequencies are not harmonised across Europe since the operator may be less able to take advantage of the relevant economies of scale that come from providing similar service quality across Europe. For example, mobile network operators may have deals with retailers and manufacturers for the production and supply of handsets that are conditioned to operate at fixed frequencies across Europe.

3.81 Clearly, if mobile handsets had to be conditioned for a separate frequency in the UK, this would potentially raise the unit costs and could result in higher costs where mobile network operators enter into supply deals with retailers/manufacturers. It is not however possible to estimate with any precision the effect of this on spectrum valuations, particularly for when using as a proxy the AIP rates paid for spectrum in the GSM bands, which has not been traded and which may in any event be liberalised in future. More generally, AIP rates paid in other bands for potential alternative users of the spectrum under consideration will always be an imperfect proxy for the opportunity costs of that spectrum.

3.82 This factor too has influenced our decisions to discount the reference rates recommended by Indepen and also to apply reference rates to L band and S band primary radar, secondary surveillance radar and DME which are well below the rates for adjacent spectrum currently used for mobile communications services.

Auctions and spectrum trades

3.83 In principle, valuations derived from auctions and trading may reflect the market's assessment of opportunity costs in different bands, taking into account such considerations as the importance of capacity versus coverage, physical properties, non-harmonisation and other relevant factors. These sources of market information will assume much greater significance as the frequency of trades and auctions increases. Indeed, in a fluid and fully functioning spectrum trading market, one would have little need to take into account theoretical considerations such as least cost alternative technology and best alternative application. However, the volume of such trades and auctions is in reality not yet sufficient to provide the market with a reliable and stable view of opportunity costs. Evidence may reflect short term market sentiment or demand for a particular tranche of spectrum.

3.84 Recognising the limited evidence on spectrum valuations taken from auction results, Ofcom notes that the recent L-Band auction (1452-1492MHz) provides one comparative valuation that lends support to Ofcom’s proposal to set AIP reference


35

rates significantly below those identified by Indepen for adjacent spectrum frequency currently allocated to radar use.

3.85 The auction design and results suggest that the L-Band auction resulted in a competitive, albeit conservative, valuation of that spectrum. The auction was forward looking with the winner awarded a licence for use of that spectrum of indefinite duration, but with an initial term of 15 years (until 2023 ).27 There were 8 bidders with the auction winner paying a price equal to second highest value bid (or combination of bids) (i.e. a second price auction). 28 Bidding continued for 33 rounds under a combinatorial clock auction design, which maximised the total amount bid by including at most only one bid from each bidder and awarding each lot only once. These factors underpinned increasing prices and reducing demand over the course of the auction, suggestive of a competitively determined price paid for the spectrum.

3.86 Importantly, the licences made available for auction did not require minimum build out requirements and hence the price paid (rather than bid) by the winning bidder provides an indication of the forward-looking opportunity cost of that spectrum (i.e. with no discount present to reflect any future investments which might not be profitable at the margin for the operator).

3.87 The up-front price of approximately £8.3 million paid by the auction winner can be expressed as an equivalent annuitised price of £36k/MHz (for a 1 X 1 MHz channel).29 This annual price could be interpreted as an indication of the annual opportunity cost of the specific spectrum in the award in its next best use (e.g. mobile multimedia services).

3.88 However, the highest value bid30 was significantly higher than the second highest bid (and represents the winning bidders' actual valuation of this spectrum, which could be considered a substitute for spectrum currently used by radar). Ofcom therefore considers that the opportunity cost of the radar spectrum will be at least £36k/MHz and potentially significantly higher, and more likely to be close to the value of the winning bid (£86k/MHz) on the same annuitised basis.

3.89 We consider that the results of the L-Band auction should inform our assessment of the opportunity cost of spectrum at similar frequencies, among the other considerations outlined above. We have borne these results in mind in setting out our proposed reference rates.

Impact assessment

3.90 In line with best regulatory practice, and our own concern to ensure we are acting in the interests of citizens and consumers, Ofcom always carries out an Impact

27 During the initial term, Ofcom cannot revoke the licence on spectrum management grounds. Ofcom notes that the spectrum could be used to provide mobile multimedia and mobile broadband services. 28 Qualcomm paid a price equal to the second highest valuation of £8.3million. 29 First convert the £8.3 million to an amount per MHz single 1 X 1 channel (ie 325,208£

403.8£

=m

).

Second, estimate the annuitised fixed amount derived using a discount factor of 15% reflecting Ofcom estimates of the cost of capital that might be relevant. 30 For a list of all bids in the L-Band auction see http://www.ofcom.org.uk/radiocomms/spectrumawards/completedawards/award_1452/notices/biddata.csv).


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Assessment before introducing significant changes to licence fees. Introducing AIP fees for the maritime and aeronautical sectors is no different. We will conduct a full Impact Assessment for each stage of AIP introduction that this document proposes:

• In proposing the detailed fees algorithm and regulations for the use of VHF radiocommunications channels;

• In the longer term, when we have developed proposals for apportioning fees to individual radar licences;

• Also in the longer term, when we have developed proposals for apportioning fees for beacons and other aeronautical navigation aids.

3.91 At this stage, we do not have detailed fees proposals for any of these categories. We are therefore not attempting to provide our assessment of the impact of fees now, but we are seeking evidence and opinions from stakeholders so that we have the best information available in moving forward on our proposals.

3.92 This information will be useful to us in assessing the likely impact of the fees we propose, and hence will help us decide whether the fee levels we are considering are appropriate, and whether we should take any particular steps to mitigate their impact, such as phasing in new fees.

3.93 We have set out an explanation of the types of information that we consider will be important in assessing the impact of proposed fees in Annex 5.

Question 4: Taking into account the information available in this document, including that set out in Annex 5, our initial views on VHF radiocommunications licence fees and on the reference rates for bands in other uses, and any information you have about the organisations to whom we are proposing to charge fees, please provide any evidence that you think is relevant to us in considering the financial impact of the fees we intend to propose for VHF radiocommunications, or for other uses.


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Section 4

4 Initial pricing proposals Scope of this review

4.1 Reflecting the scope of the Cave Audit, we have considered in this document the use of spectrum below 15GHz. Also, we are not considering spectrum below 75 MHz, including spectrum used by aeronautical marker beacons operating at 75MHz, as, with few exceptions, there currently appears to be little or no congestion in existing uses and little demand for this spectrum for alternative uses. We will keep this under review.

4.2 The civil aeronautical and maritime sectors use spectrum in the 75 MHz to 15 GHz range for a wide variety of purposes. These can loosely be grouped into 3 categories;

• VHF radiocommunications

• Radar

• Beacons and other such radionavigation aids

4.3 The maritime sector uses spectrum in the bands under consideration in this consultation document predominantly for VHF radiocommunications and radar. Some spectrum is also used for EPIRBs and Differential Global Positioning System (DGPS) correction data. Radar beacons (“racons”) used in conjunction with radar are also used by lighthouse authorities and some port authorities as a radionavigation aid enhancing the effectiveness of lighthouses and buoys. Automatic Identification System for vessels (AIS) applications use VHF radiocommunications channels and, from a spectrum point of view, can be considered synonymous with VHF radiocommunications, as would any other data channels.

4.4 VHF radiocommunications, radar and EPIRBs are transmitted by ships and smaller leisure craft. VHF radiocommunications, radar and racon are also operated by a variety of different types of ground stations including ports, search and rescue and lighthouse authorities, and a few port authorities and the lighthouse authorities use VHF to transmit specialist DGPS correction signals (although most DGPS is transmitted in MF bands, which are well below the lower frequency bound of those being considered by this consultation document).

4.5 The civil aeronautical sector uses spectrum in the range considered in this consultation exercise for VHF radiocommunications, primary radar and secondary surveillance radar and other radionavigation aids.

4.6 VHF radiocommunications are used by both aircraft and providers of ground based air traffic and air navigation services. Primary radar operating in L band, S band and X band are used mainly by providers of ground based air traffic and air navigation services. Microwave Landing Systems (“MLS”), Instrument Landing Systems (“ILS”) and VHF Omni-directional range beacons (“VOR”) are all ground based systems which transmit information which is received by aircraft. Distance Measuring Equipment (“DME”) relies on transmissions from both the ground station


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and the aircraft. Aircraft alone make use of weather radar, radio altimeters and Doppler radionavigation aids.

Who would pay fees?

We do not plan to apply AIP fees to ship radio licences

4.7 Ofcom started issuing lifetime WT Act licences for ship radio in 2006, as the previous process of administering annual renewals and charges was considered inefficient31. These licences are free if applied for online, or are issued for a small administrative charge if applied for by post. We have no plans to reverse this decision and, therefore, we are not proposing to apply AIP to any ship radio licences. We propose that ground stations (such as ports, marinas, coastguard and watch stations) should pay AIP for their use of spectrum needed for VHF radiocommunications. We also believe, in principle, that ground station operators should pay AIP for the use of spectrum needed to operate radar and racons. This is discussed further below.

We have are not proposing to apply AIP to aircraft WT Act licences

4.8 Administrative charges are currently payable for WT Act licences applicable to aircraft. The process of granting WT Act licences to aircraft is currently undertaken by the CAA on behalf of Ofcom. Ofcom understands that the CAA combines this administrative process with its processes for granting airworthiness licences which, necessarily, could not be granted on a lifetime basis. Some regular contact with licensees is, therefore, required and the risk that the process of making annual renewals and setting AIP fees in respect of WT Act licences may be inefficient is less pronounced than is the case with WT Act licences granted to ships. Where the incentive properties of AIP are expected to operate most strongly on users of aeronautical spectrum, there may be merit, in principle, in applying AIP fees directly to aircraft as well as ground stations (in contrast to the proposal in respect of the maritime sector).

4.9 Ofcom is aware, however, that AIP fees could be collected only from UK registered aircraft, and this would significantly reduce the impact of pricing on spectrum use in practice. We therefore do not currently consider that there is a good efficiency argument for setting AIP fees for aircraft WT Act licences.

Question 5: Do you agree that there is little to be gained, in terms of spectrum efficiency, from charging AIP to WT Act licences for aircraft?

We are seeking views on whether charitable rescue services should receive a discount on their licence fees

4.10 Before setting fees, we need to consider the potential impact of those fees. In many cases, there are particular users or types of user for whom the impact might be different than for the majority of users.

4.11 In this sector, the voluntary maritime rescue services (RNLI and certain others) may come into this category. These services do not have a wide range of activities, so their range of inputs is less diverse than for many businesses. Additionally, as all of

31 Ofcom, Consultation on a proposal to reform ship radio licensing, February 2005 http://www.ofcom.org.uk/consult/condocs/src/


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their activities are directed towards preserving life at sea, the potential impact of any reduction in these activities might have very serious effects.

4.12 Under the current administrative fees regime, licence fees for any maritime licence held by any user which:

a) is a charity; and

b) has as its object the safety of human life in an emergency;

are discounted by 50%.

4.13 In addition, business radio licence fees payable by such organisations, which are AIP fees rather than administrative fees, are also discounted by 50%.

4.14 We are therefore seeking views of respondents on whether this principle should be extended to AIP fees applied to aeronautical and maritime licences.

Question 6: Do you consider that we should discount fees for any particular user or type of user? Specifically, do you consider that there should be a discount for charities whose object is the safety of human life in an emergency?

We propose that DfT should face incentives to ensure that spectrum is used efficiently.

4.15 We are recommending that the DfT should consider paying AIP for spectrum reserved for use by the civil aeronautical and maritime sectors but not in licensed use; and that Government should consider whether future policy decisions regarding bands which are used by licensees, but where charging is not appropriate, could be better informed by incentive arrangements for DfT (which could take the form of payments).

4.16 The final decision whether and when DfT should pay for any spectrum that is not in licensed use, and the appropriate incentive arrangements in relation to bands used only by airborne users, is one for Government.

4.17 In the case of civil use of radar bands and civil aeronautical use of other radionavigation aids, we propose that the DfT, the MCA and the CAA, as well as spectrum users, should advise Ofcom on how some of these costs should be apportioned to licensees, such as ports, coastguards, airports and providers of air traffic and air navigation services, in the form of AIP fees for licences. In providing such advice, the MCA and the CAA would, of course, take into account any statutory obligations placed on them by Parliament. Ofcom is required to set fees in accordance with its statutory duties and must, therefore, take the final decisions about how WT Act fees are set.

4.18 We consider that there is scope to improve future policy decisions about spectrum use if DfT pays for any unused spectrum that it wishes to reserve for future use by the sector. Such an arrangement would ensure that DfT faces financial incentives to manage these bands efficiently including, where appropriate, making full use of opportunities for band sharing and replanning. Similar arrangements apply for spectrum that is not in use but is reserved for the MOD.

4.19 We also consider that there is scope to improve future policy decisions on spectrum use if DfT takes account of the opportunity cost of the spectrum used for airborne


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radionavigation aids. As noted above, it is Ofcom’s view that it would not be efficient to charge fees to UK registered aircraft alone. Ofcom is proposing that Government consider options for ensuring that DfT, as the government department responsible for transport policy, faces incentives to take account of the opportunity cost of this spectrum in any future decisions.

4.20 Ofcom recognises that use of spectrum for airborne radionavigation aids is subject to international agreements, and the UK has limited scope to make unilateral changes. In the longer term, however, perhaps over one or more investment generations, DfT does have scope to influence international decision-making. In Ofcom’s view, it is desirable for DfT to face the opportunity cost of the spectrum concerned, and to develop its long term policy strategies against this backdrop along with all other cost and benefit considerations.

4.21 Ofcom has considered whether to propose that DfT should also face the opportunity cost of VHF radiocommunications channels used by ships and aircraft which, similarly, Ofcom has proposed should not be charged to users. Our current view is that sufficient incentives to maximise efficiency (such as by reducing channel bandwidths) are presented to ground stations, particularly as spectrum costs charged to ground stations can be expected to be passed on, in whole or in part, to ships and aircraft.

Fees proposed for possible implementation during 2009 (Phase 1)

4.22 Subject to further consultation and preparation of an impact assessment, Ofcom is proposing to extend AIP-based fees to maritime and aeronautical use of VHF radiocommunications channels in 2009.

Maritime VHF radiocommunications channels

4.23 Maritime VHF radiocommunications fall into two broad classes;

• Internationally harmonised channels, including distress safety and calling; and

• UK designated channels including coastal station radio.

4.24 There are currently 59 internationally harmonised VHF maritime communications channels. 25kHz channel bandwidth is currently used although there may be scope, with international agreement, for this channel width to be reduced. These channels are internationally designated for a variety of purposes including inter ship, ship and coastal station, port operations and ship movement, public correspondence, digital selective calling (channel 70), distress safety and calling (channel 16) and AIS. Some channels are used on a duplex basis and some on a simplex basis. Ships may transmit in any of these channels (in the designated circumstances) and coast stations may transmit in most (except those where use is allocated for mobile use only). These licences are held by a variety of different types of ground station users including coastguard, search and rescue, ports, marinas and sailing clubs.

4.25 In addition, there are some 44 UK designated maritime channels, each of 25KHz bandwidth. Most are operated on a closed user basis to support commercial activity such as port or fishery operations. Some channels are reserved for specific users such as the MCA (for coastguard and other safety related operations) and the RNLI.


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4.26 Many of the maritime channels (both international and UK), especially along the south and east coasts of the UK, are severely congested and meeting demand for channels is often problematic. This is particularly so with internationally harmonised channels. Ofcom understands that, while mobile stations (ships) necessarily need access to all or most channels, reflecting their changing circumstances, the needs of ground stations are determined by their functions and the nature and level of communications use. Most coast stations generally limit themselves to one or two channels. To that extent, ground stations have some discretion about the number of channels on which they wish to transmit.

Aeronautical VHF radiocommunications channels

4.27 There are approximately 1800 ground station channel assignments in respect of aeronautical VHF radiocommunications in the UK. Most channels are 25 kHz, although there is growing use of 8.33kHz channels. Aeronautical VHF channels are used by both aircraft and ground stations for transmission and are already congested. Given the high levels of congestion and extended propagation characteristics of frequencies used at altitude, channel assignments are made by the CAA, following co-ordination with adjacent states to ensure no unacceptable interference between users of any given channel, within and beyond national boundaries.

We do not intend to apply AIP fees to distress channels.

4.28 We recognise that maritime channels 16 and 70 and aeronautical channels 121.5 MHz and 123.1 MHz are internationally harmonised for emergency use by all traffic. There is an opportunity cost arising from this use, and efficiency improvements might be implemented with international agreement.

4.29 However, at present international agreements clearly prevent any other use in these channels, as well as mandating operators to keep these channels clear. As a result, there is no prospect of individual users’ decisions, in response to pricing, resulting in any additional or alternative use of these channels. Any decisions on whether the channels could be used for new services inland would need to be taken by Government (DfT) rather than users.

4.30 It is Ofcom’s current view that incentives applied across other VHF channels (including incentives to reduce channel bandwidth) would be sufficient to inform the Government’s decisions about efficiency improvements across all VHF channels including the emergency channels. Accordingly we are not proposing to set licence fees that include the opportunity cost of these channels.

Training schools

4.31 We also propose not to apply AIP fees to onshore maritime radios where emission levels are limited to the building (typically those often used by training schools), as the impact of these devices on other spectrum users is minimal. We would, however, expect to charge AIP to suppliers’ use of maritime channels for demonstration purposes, as this denies spectrum use by others.

Aircraft and ships

4.32 As noted in paragraphs 4.7 and 4.8 above, Ofcom does not intend to charge fees to ship and aircraft radio licences.


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Charities

4.33 As noted in paragraphs 4.9 to 4.13 above, Ofcom is seeking views on whether fees payable by certain charities should be discounted.

We are proposing that fees for VHF radiocommunications channels should be set at a level which is comparable with fees currently charged for Business Radio.

4.34 In Ofcom’s view, there are two types of Business Radio licence (and, more importantly, associated pricing algorithm) relevant in this context; (i) Technically Defined and (ii) Area Defined. In the former case the permitted coverage is defined by the specified power and antenna height, whereas in the latter case the area of coverage is specified directly (eg UK-wide). We propose that AIP fees for all maritime VHF channels should be priced using an pricing algorithm very similar to that which applies to Technically Defined Business Radio licences. In the case of aeronautical VHF channels, which can have near UK-wide coverage, we propose that the pricing algorithm should be similar to that which applies to Area Defined Business Radio licences. Under these arrangements, a range of standardised AIP rates would apply, which seek to reflect relative levels of congestion at different locations (in the case of localised maritime channels), the overall popularity of the frequency band (for example whether internationally harmonised), the area covered by transmissions and whether the channel is shared or provided for exclusive use. We also propose that account should be taken of whether simplex or duplex operation is deployed. The rates applicable to Business Radio licences are set out in Ofcom’s statement Modifications to Spectrum Pricing32, which we published on 10 January 2007.

4.35 The AIP fee paid for a Technically Assigned Business Radio licence varies according to four key factors; (i) ) how densely populated is the location (three classifications) (ii) how popular is the particular frequency band (again, there are three broad categories), (iii) how wide is the coverage achieved by the transmitter and antenna (there are three local classifications plus a range of national classifications), and (iv) whether the channel is assumed to provide exclusive or shared use. Fees for Area Defined Business Radio licences take into account the overall popularity of the frequency band and the geographic coverage.

4.36 Our initial view is that, given the current levels of congestion, internationally harmonised maritime and all aeronautical VHF channels should each be considered, for pricing purposes, would be classified to be in “Highly Popular” bands, and UK maritime channels, which are on the whole less congested, would be considered, for pricing purposes, to be in “Medium Popular” bands. For the purposes of determining AIP fees, all maritime channels, except the one internationally harmonised and the two UK allocated marina channels, would be considered to offer exclusive use. These three marina channels (which are widely used by sailing clubs as well as marinas) would be considered to offer shared use (and should be priced accordingly) as no account is taken of proximity to other stations when granting licences to use these channels.

4.37 When determining fees for Technically Assigned Business Radio licences, the appropriate population density factor (a proxy for congestion at a given location) is taken from a reference map which divides the UK into a grid of squares each 50km

32 See, for example, tables 3,4 and 6 at http://www.ofcom.org.uk/consult/condocs/pricing06/statement/statement.pdf


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x 50km. Ofcom is proposing to apply a similar classification to maritime VHF channels. Instead of relying on population density, we consider it would be more appropriate to use the number of channel assignments as a proxy for congestion. As with Business Radio, we propose to define three categories of High, Medium and Low density. Our current view is that grid squares with more than 125 assignments (international, UK coastal and marina combined) should be considered High density, those with between 125 and 20 assignments should be considered Medium density and those with less than 20 assignments should be considered Low density. The number of assignments per grid is plotted on a map at Annex 6, colour coded to illustrate Ofcom’s proposed classification. The fees which we propose should apply in each of these area types are set out in the tables at figures 8 and 9 below.

4.38 Aeronautical VHF channels when used to communicate with aircraft at altitude can prevent alternative use of channels across an area equivalent to most of the UK land mass, although there is some re-use of channels. As noted above, Ofcom considers that aeronautical VHF channels use spectrum which is equivalent to the “Highly Popular” bands as defined in the pricing algorithms which apply to Business Radio33. On that basis, licence fees would be determined with reference to a rate of £396k per 1MHz of national spectrum34. However, the volume of aeronautical assignments in the UK (both 25kHz and 8.33kHz), and the extent of reuse, is such that it may not be appropriate to charge fees as though licences provide for exclusive UK-wide use of a given channel. In the case of Technically Assigned Business Radio channels, a 50% discount is applied licensees do not have exclusive use. On balance, we believe it is appropriate to apply a similar discount to aeronautical VHF channels, this time to reflect the reuse. On this basis, we propose that use of each aeronautical VHF channel should, in principle, attract an equivalent fee of £4950 for a simplex 25 kHz channel and £1650 per simplex 8.33kHz channel.

4.39 The effect of applying this approach is summarised in Figures 8, 9 and 10 below. In some instances, the fees charged to maritime users as a result of applying the approach would be lower than the administrative fees currently charged for such channels (currently £100 for an international channel, £180 for a UK channel and £75 for a shared marina channel).

Figure 8 Indicative annual fees from applying this approach to international simplex maritime 25kHz VHF channels

High coverage (watts/ antenna A metres) W> 5 and A > 10 or W ≤ 5 and A > 30

Medium coverage (watts/antenna metres) W ≤ 5 and 10 < A ≤ 30 or W> 5 and A ≤ 10

Low coverage (watts/antenna metres) W ≤ 5 and A ≤ 10





33 See table 2 to Ofcom’s statement Modifications to Spectrum Pricing at http://www.ofcom.org.uk/consult/condocs/pricing06/statement/statement.pdf 34 A 2 X 12.5 kHz Business Radio channel with UK coverage in a “Highly Popular” band costs £9900. This equates to £396k per 1MHz


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Figure 9 Indicative annual fees from applying this approach to UK simplex maritime 25kHz VHF channels

High coverage (watts/antenna metres) w> 5 and A > 10 or w ≤ 5 and A > 30

Medium coverage (watts/antenna metres) W ≤ 5 and 10 < A ≤ 30 or w> 5 and A ≤ 10

Low coverage (watts/antenna metres) W ≤ 5 and A ≤ 10





Figure 10 Indicative annual fees from applying this approach to aeronautical VHF channels Channel bandwidth

8.33 kHz simplex £1650

25 kHz simplex £4950

4.40 Ofcom will make formal fee proposals for maritime and aeronautical users after we have considered responses to the present consultation exercise. Before setting fees for any licensees, we will need to consider the potential impact of the fee levels which we propose. In order to assess this impact thoroughly, we are asking respondents to provide information and evidence about the likely impact of the fees described in this document. We will take account of all responses in developing the Impact Assessment that will accompany our full fee proposals.

Question 7: Do you agree that Ofcom should apply AIP to ground stations’ use of maritime and aeronautical VHF radiocommunications channels, to help manage growing congestion in current use and to ensure that the cost of denying access to this spectrum by potential alternative applications is faced by current users?

Question 8: Do you agree with our initial view that it would be appropriate to apply a pricing system similar to that already existing for Business Radio licences to maritime and aeronautical VHF communications? If not, what are your reasons for proposing that we should develop a fee structure for maritime and aeronautical VHF channels which is distinct from that already established for Business Radio?

Question 9: Are there any short term reasons specific to the sector(s) why it would be inappropriate to apply fees from 2009?

Fees proposed for possible implementation during 2010 (Phase 2) – radars, racons and navigation aids

4.41 Ofcom is proposing that after further consultation, fees should be applied to maritime and aeronautical use of spectrum for radar and navigation aids from 2010. In the present consultation document, Ofcom is setting out proposed reference rates which would be used as the basis for setting fees for individual licences. We expect to propose algorithms for determining licence fees, based on these reference rates, during 2009.


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Radar and racon, and other navigational aids

Maritime use of radars and racons

4.42 Maritime use of radars and racons in the UK is confined to the following frequencies:

• X band radar generally transmitting in the band 9200-9500 MHz

• S band radar transmitting in the band 2900-3100 MHz

• Radar beacons (racon) transmitting in both X and S band

4.43 Maritime X band and S band radars are used both by vessels and ground stations. A total of 200 MHz of spectrum (2900-3100 MHz) is reserved for maritime S band radar use, and a further 200 MHz (9300-9500 MHz) is reserved for maritime X band radar. In addition, a few maritime X band radars operate within the aeronautical X band (9000-9200 MHz). It should also be noted that a small number of aeronautical radars operate in the band 2900-3100 MHz. All of these bands are widely shared with the MOD. There is no sharing with other civilian users beyond the aeronautical and maritime sectors. Most maritime use of radar (S band as well as X band) is not channelised and each installation can potentially operate across the whole band. Most racons operate across the whole of the X and S bands, although a few operate only in the X band.

4.44 Ground based radar users are mainly statutory port authorities which require radar to co-ordinate the movement of shipping, and each port authority generally operates just one such radar, although a few - generally larger ports - operate more than one. The MCA’s Coastguard unit also operates a small number of radars to monitor shipping movements in the English Channel and, in the voluntary sector, the National Coastwatch Institution and a small number of other charitable organisations also operate radar to assist with coastal observation and inshore rescue. The RNLI, however, does not use radar at ground stations although its rescue boats are generally equipped with radar. A small number of other ground station radar installations have been licensed for research or demonstration purposes. Most radars used by maritime ground stations use the X band, although four ports use S band.

4.45 There are over 100 licensed racons in UK waters operated mainly by the lighthouse authorities.

4.46 S band and X band radars are also widely used by foreign and UK registered vessels in UK coastal waters and estuaries. As noted above, Ofcom has no plans to apply AIP to ship radio licences. However, vessel-based use of X band and S band radar does potentially limit alternative use of the spectrum for land based applications. Each generally has an operating range of up to 60 nm, and can affect alternative use at a much greater distances (how far, depends on the maximum tolerable field strength). In areas with navigable estuaries, the impact on possible land based spectrum use may be very extensive.

Aeronautical use of Radar

4.47 Aeronautical use of primary radar in the UK is confined to the following frequencies;

• L band transmitting in the band 1215-1350 MHz


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• S band radar transmitting in the band 2700-3100 MHz

• X band radar transmitting in the band 9000-9500 MHz

• Ku band operating in the band 15.4-17.7 GHz

4.48 Ku band lies outside the scope of this review, and Ofcom is not currently proposing to set AIP fees for the use of this band. L band, S band and X band are widely shared with the MOD. Ofcom understands that, unlike maritime use of radar, most aeronautical use is channelised and each installation generally uses a much narrower band of spectrum. Ofcom understands that congestion amongst primary radar users is not currently widespread.

4.49 There are currently over 100 civilian aeronautical radar installations in use at ground stations in the UK, the great majority of which are operated by National Air Traffic Services (“NATS”) to support en route and terminal air traffic control services. L band radar is used almost exclusively by NATS to support en route services. S band installations are used mainly in providing air traffic and air navigation services in the vicinity of airports; these services are offered by NATS and a small number of other air traffic and air navigation service providers, and airports which provide their own such services. X band radar is operated by providers of air traffic and air navigation services, mainly to monitor aircraft on the ground.

Maritime and aeronautical radar and racon users have some scope to improve the efficiency with which spectrum is used, but a high degree of central co-ordination would also be needed to achieve major improvements

4.50 Ofcom understands that there is currently little or no congestion in the frequencies allocated for maritime and aeronautical radar use. Ofcom notes, however, that there is growing demand from other users for spectrum in comparable bands. Indepen advised that, in the case of L band and S band, the best alternative use is mobile telephony and, in the case of X band, Fixed Links.

4.51 Major improvements in the efficiency with which these bands are used, potentially enabling sharing by other applications, would however require a high degree of central co-ordination and planning. The Public Safety Services Test Group (“PSSTG”) and the Radar Group, whose memberships are drawn from the CAA, MCA and MOD, are currently reviewing the scope for efficiency improvements across these bands, and this work is likely to have an important role in co-ordinating future changes. Given appropriate incentives, some individual users do have some scope to deploy sector blanking to reduce the geographic impact of their transmissions, and choice of radar type can also influence the impact on other spectrum users. The current pricing of WT Act licences for the operation of radar, which is based on the administrative cost of issuing the licence, presents no incentives for users to consider whether it would be cost-effective for them to deploy either sector blanking or more spectrally efficient radar equipment (typically solid state radar).

4.52 Ofcom recognises that differentiated and distinct algorithms may be appropriate for the maritime and aeronautical sectors recognising the equipment types deployed, the nature of the application and how these affect the extent to which spectrum is unavailable for other uses.


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Ofcom is proposing that Government, as well as spectrum users, should be involved with our future work to determine how fees for radar bands should be apportioned to radar users.

4.53 Ofcom is requesting that stakeholders, including DfT, with the expert advice of the MCA and CAA, should provide advice to Ofcom on how fees for L, S and X band spectrum used by civil maritime and aeronautical stations for radar or racon deployment should be apportioned to individual licensees. In Ofcom’s view, it will be important for Government, as well as spectrum users, to engage with Ofcom on this issue. As already noted, we are proposing that DfT should pay for any unused spectrum that it wishes to reserve for future use by the sector.

4.54 In Ofcom’s view the level of fees charged to individual licensees should take into account, as a minimum, the area sterilised by each station’s use including the impact of out of band emissions and the use or otherwise of sector blanking, thus providing users with incentives to use spectrum efficiently. Ofcom also notes that the opportunity cost of spectrum used to support a racon or radar in an isolated offshore position may be very different to the opportunity cost of similar equipment on an urbanised estuary. Ofcom therefore considers that account should be taken of the location of the equipment and whether this is a geographic coverage area of high population density where there is likely to be relatively high demand for spectrum.

4.55 In Ofcom’s view it would not be acceptable simply to apportion the total opportunity cost of all spectrum in these bands amongst ground station licensees alone as this approach would be likely to result in ground stations paying for the opportunity cost of spectrum that they do not themselves use. In Ofcom’s view it would be appropriate for the DfT to make payments in respect of the opportunity cost of any unused spectrum it wishes to reserve for the sector.

Question 10: Ofcom would welcome stakeholders’ views on the factors which should be taken into account when apportioning fees between individual users of radars and racons.

4.56 In Ofcom’s view the approach of sharing opportunity costs between DfT and ground station users of radar and racon equipment will create a powerful set of complementary incentives to seek the most efficient use of spectrum. The DfT (with the MCA and CAA), as the government department responsible for the aeronautical and maritime sectors, is well placed to co-ordinate a UK based replanning of the way radar bands are used in the UK. As noted above (see Figure 1 and 4.51), PSSTG and the Radar Group are already working together to consider options for replanning or sharing spectrum used by civil and military authorities in the maritime and aeronautical sectors.

4.57 The proposal that licensees of radar and racon at ground stations should pay AIP-based fees for the spectrum which they use will also provide incentives for individual licensees to consider the business case for using more sector blanking or more modern spectrally efficient equipment, and reach efficient decisions that suit their circumstances and needs.


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Ofcom is proposing that the reference rate, per 1 MHz of national spectrum for L band and S band radar, against which annual fees for individual licences will be derived, should be £126k

4.58 Having considered the factors explored in more detail in paragraphs 3.46 to 3.75 above, Ofcom is proposing that the reference rate per 1 MHz of national spectrum used for L band and S band radar should be £126k per year. Ofcom will propose algorithms for deriving individual licence fees from this reference rate after further discussion with users and sector regulators, and after taking into account responses to this consultation exercise.

4.59 The proposed reference rate is half the reference rate of £252k per 1MHz of national spectrum recommended by Indepen in 2007. In reaching our proposed conclusions, we have taken into account (i) Indepen’s relatively high marginal valuation of this spectrum for alternative public mobile radio use, (ii) the fees for GSM band spectrum previously set by Ofcom and the RA and (iii) the outcomes of the recent L band auction.

4.60 Our proposed reference rate is lower than the fee rates per MHz payable for comparable spectrum currently allocated for providers of GSM mobile telephony services, as well as being substantially lower than Indepen’s proposals. In Ofcom’s view this is an appropriate starting point as full account should be taken of the current use valuation. In our view (and following the recommendation of the Cave Audit), it is important to take a conservative approach when setting fees under AIP principles to avoid regulatory distortions, including the risk that spectrum might be left unused if fees are set too high.

4.61 Ofcom has considered whether distinct reference rates should be set for aeronautical L band (1215-1350 MHz) and S band (2700-3100 MHz) radar use, given the evidence that there is a value gradient which falls as spectrum frequency increases. As noted in paragraphs 3.62 to 3.68 above, Ofcom has considered a number of ways in which a value gradient might be used to inform decision making about the relative levels of AIP fees payable for a variety of spectrum bands used by the maritime and aeronautical sectors. However, Ofcom considers that it would be premature to attempt to distinguish between reference rates for these two bands, given that it is not clear the extent to which the relevant opportunity costs in these bands vary by frequency and hence to what extent radar users could or should face incentives which might encourage them to migrate current use between these bands. At this time, therefore, we are proposing to set the same reference rate for both bands.

4.62 Ofcom is proposing to consult widely with stakeholders (including regulators and government) on appropriate algorithms for determining fees for individual licence fees and will next consult on these algorithms later this year.

Question 11: Do you agree with our initial view that a reference rate of £126k per 1 MHz of national spectrum for L band and S band radar spectrum would achieve an appropriate balance between providing incentives to ensure efficient use of spectrum while guarding against the risks of regulatory failure in setting the reference rate too high? If you consider a different rate would be more appropriate, please provide any evidence that you think we should take into account.


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Ofcom is proposing that the reference rate, per 1 MHz of national spectrum, for X band radar spectrum should be £25k per year

4.63 Spectrum used for X band radar (at 9000-9500 MHz) is not currently suitable for mobile communications applications. Instead, both Indepen and Ofcom consider that the most valuable alternative use would instead be for Fixed Links, where there is a risk that demand may soon exceed available spectrum capacity in some areas. Ofcom’s assessment of opportunity cost based reference rates for X band radar spectrum has, therefore, also had regard to this different alternative use.

4.64 AIP is already widely applied to licence fees for Fixed Links spectrum in a variety of bands. Reference prices are specified on the basis of a price per link and pricing algorithms for determining the fee for a specific licence take account of, amongst other things, the relative popularity of different bands and the congestion experienced. Radar use, by contrast, denies alternative use of spectrum across an area radiating out from the transmitter (except to the extent that sector blanking is deployed). Pricing algorithms based on the concept of a price per link are, therefore, not directly capable of being applied to radar use.

4.65 Indepen and its predecessor advisers previously attempted to derive methodologies for translating per link prices to a format based on a price per geographic coverage (and vice versa). These attempts were generally based on consideration of the maximum number of Fixed Links capable of being used nationally within a given band. To some extent, such considerations can be informed by the actual number of links being used in popular bands. Ofcom considers that this analysis can help determine a lower bound to any judgement of the number of links which a national band could, in theory, hold. Nevertheless any comparisons of prices per link with prices per band will be subject to a high degree of judgement.

4.66 As noted above, there is little or no congestion in current use for radar and, on that basis, Indepen considered that there was no opportunity cost in current use. Indepen assumed that the marginal cost associated with denying the availability of this spectrum for alternative Fixed Links use was £85k35 per 1 MHz of national spectrum. Indepen noted that this assessment was based on its own consideration of least cost alternatives for Fixed Links included in the report produced for Ofcom by Indepen in 2004. Having determined those two valuations of opportunity cost for X-band spectrum used by radars (in current use and alternative use), Indepen derived a recommended AIP reference rate per 1 MHz of national spectrum in the band 9000- 9500 of £34k per 1MHz of national spectrum (this being a conservative estimate based on the midpoint between the two valuations, further discounted by 20% to reflect uncertainty and the risk of regulatory failure).

4.67 When Ofcom previously determined AIP fees for Fixed Links in 200536, it based fees on a reference “Spectrum Price” of £88 per 2 x1 MHz reference link (£44/MHz). This was a marked reduction from the £132 per 2 x 1 MHz link (£66/MHz)recommended by Indepen in its 2004 report to Ofcom. The reference rate adopted by Ofcom took into account our decision not to include distinct antenna and sharing factors in the pricing algorithm, but instead include an overall judgement on the impact of these factors within the reference price. It also reflected

35 Table 6.1 of Indepen 2007 erroneously specified this value as £95k, but the text makes plain that a value of £85k was assumed 36 See Ofcom statement Spectrum pricing dated 23 February 2005 at http://www.ofcom.org.uk/consult/condocs/spec_pricing/statement/statement.pdf


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a view distinct from Indepen on the impact of congestion on the underlying valuation. The decision not to include distinct antenna and sharing factors reduced the assumed valuation per 2 x 1MHz link from £99 to £88.

4.68 The two comparable reference rates per 2 x 1MHz link (setting aside the issue of how the two adjustment factors should be accommodated) are therefore the £132 recommended by Indepen and the £99 assumed by Ofcom in its own assessment. Ofcom’s conclusions therefore represented a discount of 25% against the reference rate recommended by Indepen in 2004. Indepen’s 2004 recommendation was further relied upon in its 2007 conclusion that the valuation in alternative use of maritime and aeronautical bands between 4200 MHz and 15700 MHz should be £85k. Ofcom considers that account should be taken of the more conservative approach it previously took to reflecting opportunity costs in AIP fees for Fixed Links themselves, when considering the value of X band radar spectrum in alternative Fixed Links use.

4.69 Ofcom is, therefore, proposing that the reference rate per 1 MHz of national spectrum in the band 9000-95000 used by maritime and aeronautical X band radar should be £25k per year. This is a conservative assessment which takes into account the risk of regulatory failure which, if AIP is set too high, could cause spectrum to lie unused. The proposed rate is 25% lower than the rate recommended by Indepen in 2007. This proposed 25% reduction is consistent with the 25% reduction in the estimates of opportunity costs reflected in AIP fees for Fixed Links.

4.70 As noted above, Ofcom proposes to consult widely on appropriate algorithms for determining fees for individual licence fees.

Question 12: Do you agree with our initial view that a reference rate of £25k per single MHz of national spectrum would be appropriate for deriving fees for licences to use X band radar?

4.71 In summary, Ofcom is proposing that the following reference rates (per 1MHz of

national spectrum) should apply to the radar bands (please note that these are not proposed rates per licence):

Figure 11 Initial view on reference rates for a national allocation of 1 MHz in radar bands Band Reference rates per 1 MHz of national

spectrum L band transmitting in the band 1215-1350 MHz S band radar transmitting in the band 2700-3100 MHz X band radar transmitting in the band 9000-9500 MHz

£126,000 £126,000 £25,000

4.72 Secondary surveillance radar is discussed in the following section.

Aeronautical radionavigation aids

4.73 The aeronautical spectrum uses which Ofcom has considered (in addition to the primary radar and VHF radiocommunications discussed above) include the following;


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• Secondary surveillance radar (1030/1090MHz)

• Microwave Landing Systems (“MLS”),

• Instrument Landing Systems (“ILS”),

• VHF Omni directional Range stations (“VOR”),

• Distance Measuring Equipment (DME),

• Airborne weather radar,

• Radio altimeters

• Doppler Radionavigation aids.

4.74 As recommended by the Cave Audit, the CAA is reviewing the use of aeronautical radionavigation aids to determine whether fewer systems could continue to satisfy operational requirements. The CAA expects to publish a draft report during the summer of 2008. In advance of the CAA concluding this consideration, we believe that signalling the opportunity cost of spectrum through reference rates, and later through fees, will help users and the CAA in judging which uses to prioritise for change, in light of the operational benefits and costs (including spectrum costs and potential spectrum savings).

4.75 Ofcom understands that there is little congestion in these current aeronautical uses of spectrum in general, although there is some evidence that spectrum needed for ILS and DME is already congested in some areas. Ofcom would welcome an informed assessment of current and future congestion that the aeronautical sector can offer. In particular, the spectrum allocated to MLS is largely unused as the intention that MLS would replace ILS has not so far been realised.

4.76 On this occasion we are not considering aeronautical marker beacons which operate at 75MHz, as these lie outside the scope of this review.

Question 13: Do you agree that, generally, spectrum used by aeronautical radionavigation aids is currently uncongested? Do you believe that this may change during the next few years and, if so, approximately when?

Ofcom is proposing to determine reference rates per 1MHz of national spectrum for ground based aeronautical radionavigation aids.

4.77 As with fees for radar bands, Ofcom is proposing to determine reference rates per 1 MHz of national spectrum for aeronautical radionavigation aids based on the opportunity costs of the spectrum in alternative and current uses. Ofcom is proposing that DfT, as the Government department which represents the UK at fora where international harmonisation agreements and treaties are made (and as the government department which has power to set the policy framework within which the CAA and the MCA operate when acting as the UK negotiator), should contribute, along with spectrum users, to our decisions on how fees for individual licensees should be derived from the reference rates.

4.78 Ofcom is proposing that DfT should make payments in respect of the opportunity cost of unused spectrum not licensed to ground based users of aeronautical


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radionavigation aids. Ofcom recognises that changes to the way aeronautical radionavigation aids are deployed may sometimes take many years to achieve, but the application of AIP provides DfT and the industry with the longer term incentives to consider spectrum costs when negotiating international agreements and when planning operational requirements in the UK.

4.79 We recognise that DfT may wish to consult closely with the CAA when contributing to discussions on fee algorithms. Ofcom understands that the CAA’s existing spectrum planning tools are well suited to carrying out this assessment. As with the process of determining fees for individual users of primary radar, Ofcom is proposing to set out clear guidance on the general framework for the approach to be taken and the factors to be taken into account, including whether or not we confirm our initial view that aircraft should not be charged AIP fees. To ensure compliance with its own statutory duties, Ofcom would of course reserve to itself the final decision on the level of fees to be applied to each licensee.

We are proposing that government should consider whether and how DfT might recognise the opportunity cost of spectrum used by airborne systems

4.80 Radio altimeters, weather radar and Doppler radionavigation aids are airborne systems and we are not currently proposing to apply AIP to aircraft licences. DfT (taking advice from the CAA) is responsible for policy decisions on the reservation of these bands to airborne use, and the international agreements which ensure aircraft from any country may use these over the UK. There are, therefore, potential benefits in DfT recognising the opportunity cost of these bands, such that it could take this into account along with the benefits available from reserving spectrum for these uses in the UK.

Ofcom is proposing to use a range of benchmarks to determine national reference rates for aeronautical radionavigation aids

4.81 As noted in paragraphs 3.46 to 3.75 above, there is a variety of different ways in which AIP for these bands can be assessed. Indepen derived its recommended AIP levels on the basis of assessments of own use marginal value and the marginal value in alternative use, setting the AIP level at a point between these two values and also reflecting the levels of uncertainty. Comparisons can also be drawn with the level of AIP already applied by Ofcom in comparable bands.

VOR and ILS

4.82 The 108-118 MHz band is used by VOR and partly (108-112 MHz) by ILS. The 328.6-335.4 MHz band is used for ILS glide path. Both bands, like the spectrum used for VHF radiocommunications channels, would be alternatively suitable for Business Radio applications, for which there is growing demand. On this basis, Indepen recommended that AIP should be payable at £217k per 1 MHz of national spectrum. Indepen based its recommendation on an assessment that the opportunity cost in current use is zero, as there is little or no congestion, while the opportunity cost in the alternative Business Radio use is £620k. Indepen then took the midpoint between these two values and discounted this by 30% to reflect regulatory uncertainty to create a conservative estimate of the relevant opportunity costs.

4.83 As noted in paragraph 3.58 above, Ofcom previously determined Business Radio AIP fees for Medium popular bands on a basis which assumes a much lower, conservative, estimate of opportunity cost of £330k per 1MHz of national spectrum.


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It may therefore, be appropriate to take a similar valuation of the opportunity costs represented by alternative Business Radio use when considering the opportunity cost, in alternative use, of spectrum used for ILS and VOR. A valuation of £330k per 1 MHz of national spectrum in the alternative Business Radio use, set against a zero valuation of current uncongested aeronautical use, would imply under Indepen’s methodology (midpoint discounted by 30%) a reference rate of £115k per 1 MHz of national spectrum.

4.84 In Ofcom’s opinion, this rate of £115k per 1 MHz of national spectrum is an appropriately conservative estimate of the relevant opportunity costs at this stage, specifically it is appropriate that the proposed fee rate should take account of the fact that this spectrum is currently used for purposes very different from Business Radio, and that the zero valuation in current use should be reflected in the AIP rate. The risk of regulatory failure is much greater where current use and assumed best alternative use is widely divergent, as erroneous assumptions may lead to spectrum being released with little prospect of reuse.

4.85 Ofcom is therefore proposing that the reference rate per 1 MHz of national spectrum applicable to VOR and ILS should be £115k per year.

4.86 Ofcom proposes to set out a framework under which fees for individual licensees might be determined in light of this national fee level. We will consult widely on the details before proposing licence fees for these bands.

DME and secondary surveillance radar

4.87 The 960-1215 MHz band and the 1030/1090 MHz frequencies used by secondary surveillance radar (SSR) lie within a band which, like L band and S band primary radar, is suitable for public mobile radio applications, for which there growing demand for spectrum. Ofcom understands that there is no congestion in current use and, therefore, the opportunity cost in current use is zero. For the reasons set out in relation to L band and S band radar spectrum, Ofcom is proposing that the annual reference fee for spectrum used by DME and SSR should be £126k per 1 MHz of national spectrum. Ofcom will propose an algorithm for determining individual licence fees after further discussion with stakeholders (including spectrum users, the DfT and the CAA).

Ground based MLS

4.88 Indepen recommended that MLS (5000-5150 MHz) should be charged at £42.5k per 1 MHz of national spectrum. Indepen’s conclusions were based on an assessment of current and alternative use similar to the assessment made in respect of X band radar, in so far as current use in both cases is uncongested and, therefore, assumed to have zero opportunity cost, while the best alternative use is assumed to be Fixed Links.

4.89 In the case of MLS (and airborne altimeters and weather radar) Indepen recommended against discounting the midpoint between valuations of current and alternative use, as Indepen considered that there are possible higher value alternative applications for spectrum below 6 GHz identified to MLS, including WiFi and, in due course, future mobile services such as 4G. Ofcom concurs with the view that the risk of regulatory failure in setting reference rates too high is correspondingly somewhat lower in this case.


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4.90 As with Indepen’s recommended fee rate for X band radar, the recommendation in respect of MLS, weather radar and altimeters assumes a value in the alternative Fixed Links use which is 25% higher than the conservative opportunity cost value implied by the licence fee currently applied by Ofcom to Fixed Links. Applying the same approach as we propose for X Band radar, we propose to apply a reference fee per 1 MHz of national spectrum of £32k (25% below the Indepen recommendation).

4.91 As noted above, we propose to set out a framework under which fees for individual licences might be determined in light of this national reference rate. We will consult widely on the details before proposing licence fees for this bands.

Airborne radio altimeters and weather radar

4.92 Indepen recommended that airborne radio altimeters (4200-4400 MHz) and weather radar (5350-5470 MHz) should be charged at £42.5k per 1 MHz of national spectrum. Following the same approach as for MLS, we propose to use a reference rate per 1 MHz of national spectrum of £32k.

4.93 As Ofcom is not proposing to apply AIP fees to aircraft radio licences, the question of apportioning fees to individual licences to use airborne weather radar and radio altimeters does not arise. Nevertheless, given the important role of DfT (with the CAA) in assessing the costs and benefits to the UK of agreeing these reservations of spectrum, or proposing changes, we consider that there is scope to improve the information taken into account in these decisions if DfT recognises this cost. Whether and how this might be implemented is a matter for Government.

Airborne Doppler radionavigation aids

4.94 Given the higher frequencies at which Doppler radionavigation aids are operated (13250-13400 MHz) Indepen recommended that fee rates which it had derived from the midpoint of the current use and alternative use valuations should be discounted by the larger figure of 40%, reflecting the greater uncertainty of demand from alternative applications and the correspondingly higher risk of setting fee levels too high. The rest of Indepen’s assessment was as per its assessments in respect of X radar and the aeronautical radionavigation aids considered in the preceding paragraphs (ie Indepen assumed a zero valuation in uncongested current use and an alternative use valuation of £85k/MHz). This led to an Indepen recommendation of a charge of £25.5k per 1 MHz of national spectrum in this band.

4.95 Following a similar approach to those set out above in respect of X band radar, MLS, weather radar and altimeters, we are therefore proposing that a reference rate of £19k per 1 MHz of national spectrum should be used for Doppler radionavigation aids. For the same reasons as set out in relation to weather radar and altimeters, we consider that there is scope to improve the information for policy decisions if DfT recognises these costs.

Question 14: Do you agree with the basis on which Ofcom has arrived at its initial view on reference rates for aeronautical radionavigation aids?


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Maritime and aeronautical use of EPIRBs and ELTs

4.96 A total of 200 kHz of spectrum is used by EPIRBs and ELTs at 121.45-121.55 MHz and 406-406.1 MHz. Ofcom understands that the satellite alerts on 121.5 MHz will no longer be monitored by Cospas-Sarsat37 from 2009, although this frequency will continue to be used for homing after search and rescue has been initiated. Spectrum can therefore be expected to remain reserved for this purpose.

4.97 EPIRBs and ELTs are transmitted by vessels and aircraft in distress and, as noted above, Ofcom has no plans to charge AIP to ship radio licences and aircraft licences. There is an option, in principle and subject to Government agreement, for DfT to pay for this spectrum which is reserved for maritime use. This spectrum is internationally harmonised and the DfT, the MCA and the CAA, as the UK representatives at international fora where such conventions are agreed, may be best placed to take into account spectrum fees payable when considering future use of this spectrum for EPIRBs and ELTs.

4.98 The spectrum used by both 121.5 MHz and 406 MHz EPIRBs and ELTs could be considered comparable with spectrum used by Business Radio. As such, the value in alternative use of a 1 MHz national channel might be expected to be around £330k (see paragraph 3.58 above). However, given the small amount of spectrum used, Ofcom does not believe that annual fees set on the basis of this reference rate would be likely to have a material impact on the incentives of DfT when faced with the possibility of negotiating changes to the internationally harmonised use of this spectrum. Therefore, we are not proposing that the opportunity cost of this spectrum should be recognised, either by payments or other arrangements, by DfT, at this time. Ofcom will keep this under review.

Summary of phase 2 proposals

4.99 Ofcom is proposing to adopt reference rates for radar and aeronautical radionavigation aids as follows (please note that these are not proposed rates per licence):

Figure 12 Summary of initial view on annual reference rates for radar and aeronautical navigation aids Use Band Proposed annual reference rate

per 1 MHz of national spectrum

VOR & ILS (aeronautical) 108-112 MHz, 108-118MHz, 328.6-335.4 MHz

£115k

DME (aeronautical) 960-1215 MHz £126k

L band radar (aeronautical) 1215-1350 MHz £126k

S band radar (maritime and aeronautical)

2700-3100 MHz £126k

MLS, weather radar and radio altimeters (aeronautical)

5000-5150MHz, 5350-5470MHz and 4200-4400 MHz

£32k

X band radar (maritime and aeronautical)

9000-9500 MHz £25k

37 See http://www.cospas-sarsat.org/FirstPage/121.5PhaseOut.htm


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Doppler radionavigation aids (aeronautical)

13250-13400 MHz £19k

Sharing of aeronautical and maritime bands between civil and military users

4.100 Spectrum used by the civil maritime and civil aeronautical sectors is often shared with military users of radar and aeronautical radionavigation aids. Therefore, account needs to be taken of military use in the band. Sharing of the spectrum bands considered in this consultation document generally involves military and civilian use of similar equipment - typically military radar sharing with civilian radar or military aeronautical radionavigation aids sharing with civilian aeronautical radionavigation aids. Where a band is shared with other applications, the sharing is generally based on a sub division of the wider band and, when determining fees attributable to DfT, Ofcom would accordingly deduct such military sub-bands from the calculation of opportunity cost arising from civil uses.

4.101 DfT and MOD are reviewing their sharing arrangements with a view to defining responsibilities more clearly. The output of that review may be particularly important if MOD (and, possibly, DfT) decide to request formal recognition of their respective rights in the form of tradable Recognised Spectrum Access (“RSA”). RSA granted to Crown bodies is akin to WT Act licences and protects the interests of Crown bodies by ensuring that Ofcom takes account of the rights defined in the RSA when granting licences or RSAs to others. RSA cannot be granted where this is in conflict with rights granted to others – typically where licences granted to others are already in force.

4.102 The current proposals to extend AIP to civil aeronautical and maritime spectrum are distinct from any moves that the Crown bodies involved in the use of the relevant spectrum might make to request RSA. This is because most of the present use of civil aeronautical and maritime spectrum is already licensed to non-Crown users; the MCA’s use of a small number of radars and other radiocommunications equipment is an exception. Ofcom is proposing that DfT, as the Crown body responsible for policy and legislation in the sector, should pay charges reflective of AIP for unused spectrum reserved for civil aeronautical or maritime use. In these instances, it is necessary to agree what proportion of the total AIP fee, based on full national coverage of the shared bandwidth, should be paid by DfT and what proportion by MOD.

4.103 For this particular purpose, we are proposing that a relatively simple methodology, based on numbers of radar or radionavigation aids, could be used to determine what proportion of the national fees for radar bands and for aeronautical radionavigation aids should be assumed to be the responsibility of DfT and what proportion the responsibility of MOD, reflecting the extent to which the spectrum is used for civil and military applications. Ofcom is aware, however, that military radar and, to a lesser extent, military aeronautical radionavigation aids, generally have much higher power output, which greatly increases the impact on potential adjacent users. Ofcom is therefore proposing to weight the simple count of equipment installation by typical power output of civil and military equipment respectively when apportioning opportunity cost estimates between the DfT and MOD (where fees are not charged to licensees). MOD has already agreed with HM Treasury targets for improving spectral efficiency of its use of all bands over the period to 21011/12. How responsibility for payments based on opportunity cost is


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shared between these two parts of the Crown is, ultimately, a matter for the Crown to determine

4.104 In determining fees to apply to individual licensees, Ofcom intends that the full national band values (ie the rates per 1 MHz of national spectrum) should be adopted as the starting point for assessing the appropriate level of fees (that is, without reference to the simplified apportionment principles applied to MOD and DfT), and that account should be taken of some of the technical characteristics of different radar types.

We will consider timing and other implementation issues before proposing licence fees

4.105 Ofcom recognises, in taking all its fee decisions, that a sudden change in spectrum costs could have unexpected and detrimental impacts in the short term if this was to disrupt the provision of goods and services. It will be important, therefore, to consider what impact a change in spectrum costs would have on the services which depend on access to spectrum, and to understand those businesses’ cost profiles and other aspects that affect their ability to manage input price changes.

4.106 We hope that during the consultation period on this document, users and other stakeholders will take the opportunity to present and explain relevant aspects of their businesses, in the context of the indicative proposals set out in this document, so that we can take full account of such feedback and information in drawing up fees proposals, and in undertaking the Impact Assessment that will accompany them.

4.107 Ofcom recognises that a phasing in period may be appropriate particularly in cases where users need time to adjust to paying AIP for spectrum that previously had a zero valuation and zero (or low) price. Phasing in fees can limit disruption to service provision that might otherwise result if the fee changes are significant enough to cause shocks if introduced all at once. However phasing in prices itself has a cost, from reduced or delayed full opportunity cost signals for users’ and regulators’ decisions; and it increases complexity and reduces clarity for users and potential users. Ofcom is not yet consulting on the detailed implementation of the licence fees that we expect to introduce after we have considered ways of apportioning the band opportunity cost to individual assignments. We will set out our implementation proposals, including whether we consider phasing is appropriate for any of these bands, when we consult on our licence fee proposals.

4.108 In cases where Ofcom considers that there is scope for improving information for policy decisions if the DfT faces the opportunity cost of spectrum, either through payments on a comparable basis to AIP-based fees, or any other arrangement, any decision to put in place arrangements to secure this will be for Government. Similarly, the timing of implementing any such arrangements will be for Government to consider.

Next steps

4.109 After considering responses to this consultation exercise, Ofcom intends to make formal proposals for specific fees to apply to maritime and aeronautical VHF radiocommunications channels. At the same time Ofcom will set out an impact assessment in respect of those proposals. After considering responses to that second consultation Ofcom expects to publish a concluding statement and draft Regulations to implement the decision.


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4.110 The second consultation will also set out Ofcom’s firm proposals on reference rates to apply to radar and aeronautical radionavigation aids. Ofcom will also set out for comment initial proposals for factors which should be taken into account when devising algorithms to derive individual licence fees from the agreed reference rates. Ofcom will then work closely with DfT, the CAA, the MCA and spectrum users in determining the nature of those algorithms and we expect to consult informally with stakeholders, including at one or more stakeholder workshops, before setting out formal proposals for consultation during 2009.


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Annex 1

1 Responding to this consultation How to respond

A1.1 Ofcom invites written views and comments on the issues raised in this document, to be made by 5pm on 30 October 2008.

A1.2 Ofcom strongly prefers to receive responses using the online web form at http://www.ofcom.org.uk/consult/condocs/aip/, as this helps us to process the responses quickly and efficiently. We would also be grateful if you could assist us by completing a response cover sheet (see Annex 3), to indicate whether or not there are confidentiality issues. This response coversheet is incorporated into the online web form questionnaire.

A1.3 For larger consultation responses - particularly those with supporting charts, tables or other data - please email [email protected] attaching your response in Microsoft Word format, together with a consultation response coversheet.

A1.4 Responses may alternatively be posted or faxed to the address below, marked with the title of the consultation. Michael Richardson Riverside House 2A Southwark Bridge Road London SE1 9HA Note that we do not need a hard copy in addition to an electronic version. Ofcom will acknowledge receipt of responses if they are submitted using the online web form but not otherwise.

A1.5 It would be helpful if your response could include direct answers to the questions asked in this document, which are listed together at Annex X. It would also help if you can explain why you hold your views and how Ofcom’s proposals would impact on you.

Further information

A1.6 If you want to discuss the issues and questions raised in this consultation, or need advice on the appropriate form of response, please contact Michael on 020 7981 3000.

Confidentiality

A1.7 We believe it is important for everyone interested in an issue to see the views expressed by consultation respondents. We will therefore usually publish all responses on our website, www.ofcom.org.uk, ideally on receipt. If you think your response should be kept confidential, can you please specify what part or whether all of your response should be kept confidential, and specify why. Please also place such parts in a separate annex.


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A1.8 If someone asks us to keep part or all of a response confidential, we will treat this request seriously and will try to respect this. But sometimes we will need to publish all responses, including those that are marked as confidential, in order to meet legal obligations.

A1.9 Please also note that copyright and all other intellectual property in responses will be assumed to be licensed to Ofcom to use in order to fulfil any of its regulatory functions or obligations. Ofcom’s approach on intellectual property rights is explained further on its website at http://www.ofcom.org.uk/about/accoun/disclaimer/

Next steps

A1.10 Following the end of the consultation period, Ofcom intends to publish a further consultation later in 2008.

A1.11 Please note that you can register to receive free mail Updates alerting you to the publications of relevant Ofcom documents. For more details please see: http://www.ofcom.org.uk/static/subscribe/select_list.htm

Ofcom's consultation processes

A1.12 Ofcom seeks to ensure that responding to a consultation is easy as possible. For more information please see our consultation principles in Annex 2.

A1.13 If you have any comments or suggestions on how Ofcom conducts its consultations, please call our consultation helpdesk on 020 7981 3003 or e-mail us at [email protected]. We would particularly welcome thoughts on how Ofcom could more effectively seek the views of those groups or individuals, such as small businesses or particular types of residential consumers, who are less likely to give their opinions through a formal consultation.

A1.14 If you would like to discuss these issues or Ofcom's consultation processes more generally you can alternatively contact Vicki Nash, Director Scotland, who is Ofcom’s consultation champion:

Vicki Nash Ofcom Sutherland House 149 St. Vincent Street Glasgow G2 5NW Tel: 0141 229 7401 Fax: 0141 229 7433 Email [email protected]


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Annex 2

2 Ofcom’s consultation principles A2.1 Ofcom has published the following seven principles that it will follow for each public

written consultation:

Before the consultation

A2.2 Where possible, we will hold informal talks with people and organisations before announcing a big consultation to find out whether we are thinking in the right direction. If we do not have enough time to do this, we will hold an open meeting to explain our proposals shortly after announcing the consultation.

During the consultation

A2.3 We will be clear about who we are consulting, why, on what questions and for how long.

A2.4 We will make the consultation document as short and simple as possible with a summary of no more than two pages. We will try to make it as easy as possible to give us a written response. If the consultation is complicated, we may provide a shortened version for smaller organisations or individuals who would otherwise not be able to spare the time to share their views.

A2.5 We will normally allow ten weeks for responses to consultations on issues of general interest.

A2.6 There will be a person within Ofcom who will be in charge of making sure we follow our own guidelines and reach out to the largest number of people and organizations interested in the outcome of our decisions. This individual (who we call the consultation champion) will also be the main person to contact with views on the way we run our consultations.

A2.7 If we are not able to follow one of these principles, we will explain why. This may be because a particular issue is urgent. If we need to reduce the amount of time we have set aside for a consultation, we will let those concerned know beforehand that this is a ‘red flag consultation’ which needs their urgent attention.

After the consultation

A2.8 We will look at each response carefully and with an open mind. We will give reasons for our decisions and will give an account of how the views of those concerned helped shape those decisions.


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Annex 3

3 Consultation response cover sheet A3.1 In the interests of transparency and good regulatory practice, we will publish all

consultation responses in full on our website, www.ofcom.org.uk.

A3.2 We have produced a coversheet for responses (see below) and would be very grateful if you could send one with your response (this is incorporated into the online web form if you respond in this way). This will speed up our processing of responses, and help to maintain confidentiality where appropriate.

A3.3 The quality of consultation can be enhanced by publishing responses before the consultation period closes. In particular, this can help those individuals and organisations with limited resources or familiarity with the issues to respond in a more informed way. Therefore Ofcom would encourage respondents to complete their coversheet in a way that allows Ofcom to publish their responses upon receipt, rather than waiting until the consultation period has ended.

A3.4 We strongly prefer to receive responses via the online web form which incorporates the coversheet. If you are responding via email, post or fax you can download an electronic copy of this coversheet in Word or RTF format from the ‘Consultations’ section of our website at www.ofcom.org.uk/consult/.

A3.5 Please put any parts of your response you consider should be kept confidential in a separate annex to your response and include your reasons why this part of your response should not be published. This can include information such as your personal background and experience. If you want your name, address, other contact details, or job title to remain confidential, please provide them in your cover sheet only, so that we don’t have to edit your response.


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Cover sheet for response to an Ofcom consultation

BASIC DETAILS

Consultation title:

To (Ofcom contact):

Name of respondent:

Representing (self or organisation/s):

Address (if not received by email):

CONFIDENTIALITY

Please tick below what part of your response you consider is confidential, giving your reasons why

Nothing Name/contact details/job title

Whole response Organisation

Part of the response If there is no separate annex, which parts?

If you want part of your response, your name or your organisation not to be published, can Ofcom still publish a reference to the contents of your response (including, for any confidential parts, a general summary that does not disclose the specific information or enable you to be identified)?

DECLARATION

I confirm that the correspondence supplied with this cover sheet is a formal consultation response that Ofcom can publish. However, in supplying this response, I understand that Ofcom may need to publish all responses, including those which are marked as confidential, in order to meet legal obligations. If I have sent my response by email, Ofcom can disregard any standard e-mail text about not disclosing email contents and attachments.

Ofcom seeks to publish responses on receipt. If your response is non-confidential (in whole or in part), and you would prefer us to publish your response only once the consultation has ended, please tick here.

Name Signed (if hard copy)


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Annex 4

4 Consultation questions Question 1: How should Ofcom manage the process of taking advice from users, regulators and government on efficient apportionment of AIP fees in the maritime and aeronautical sectors? Are any new institutional arrangements needed?

Question 2: If you consider that our proposals for pricing ground station users for any spectrum would be likely to have a detrimental impact on safety, please let us know. In order for us to understand your assessment fully, it would be helpful if you could outline the mechanisms whereby this might happen.

Question 3: Do you have any evidence which indicates that AIP charged to ground stations could have a material detrimental impact on UK competitiveness?

Question 4 : Taking into account the information available in this document, including that set out in Annex 5, our initial views on VHF radiocommunications licence fees and on the reference rates for bands in other uses, and any information you have about the organisations to whom we are proposing to charge fees, please provide any evidence that you think is relevant to us in considering the financial impact of the fees we intend to propose for VHF radiocommunications, or for other uses.

Question 5: Do you agree that there is little to be gained, in terms of economic efficiency, from charging AIP to WT Act licences for aircraft?

Question 6: Do you consider that we should discount fees for any particular user or type of user? Specifically, do you consider that there should be a discount for charities whose object is the safety of human life in an emergency?

Question 7: Do you agree that Ofcom should apply AIP to ground stations’ use of maritime and aeronautical VHF radiocommunications channels, to help manage growing congestion in current use and to ensure that the cost of denying access to this spectrum by potential alternative applications is faced by current users?

Question 8: Do you agree with our initial view that it would be appropriate to apply a pricing system similar to that already existing for Business Radio licences to maritime and aeronautical VHF communications? If not, what are your reasons for proposing that we should develop a fee structure for maritime and aeronautical VHF channels which is distinct from that already established for Business Radio?

Question 9: Are there any short term reasons specific to the sector(s) why it would be inappropriate to apply fees from April 2009?

Question 10: Ofcom would welcome stakeholders’ views on the factors which should be taken into account when apportioning fees between individual users of radars and racons.

Question 11: Do you agree with our initial view that a reference rate of £126k per 1 MHz of national spectrum for L band and S band radar spectrum would achieve an appropriate balance between providing incentives to ensure efficient use of spectrum while guarding against the risks of regulatory failure in setting the reference rate too


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high? If you consider a different rate would be more appropriate, please provide any evidence that you think we should take into account.

Question 12: Do you agree with our initial view that a reference rate of £25k per single MHz of national spectrum would be appropriate for deriving fees for licences to use X band radar?

Question 13: Do you agree that, generally, spectrum used by aeronautical radionavigation aids is currently uncongested? Do you believe that this may change during the next few years and, if so, approximately when?

Question 14: Do you agree with the basis on which Ofcom has arrived at its initial view on reference rates for aeronautical radionavigation aids?


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5 How we will assess the impact of any fees Introduction

A5.1 Under section 7 of the Communications Act 2003 (the Act), we are required to carry out and publish an Impact Assessment whenever:

• we are proposing to do anything for the purposes of, or in connection with, the carrying out of our functions; and

• it appears to us that the proposal is important.

A5.2 Introducing spectrum fees for aeronautical and maritime spectrum users is a significant change to how we manage this spectrum, and is an important change for the users in these sectors.

A5.3 In addition, the Government Response to the Cave Audit made clear, in relation to any proposals for specific fees for the aeronautical sector:

“Ofcom, advised by the CAA, will take account of the implications of AIP for airspace users, for safety and compliance with international obligations and for stakeholders in the wider economy who would benefit from the enhanced access to spectrum.”38

A5.4 We therefore plan to carry out a full Impact Assessment before proposing any detailed fees for licences.

A5.5 As we have only reached an initial view on possible fee structures and rates for VHR radiocommunications licences, and similarly we have only an initial view on the reference rates for bands in other uses, we have not provided an impact assessment at this stage. We need to understand the potential impact on users before we can move to proposing such fees or determining such reference rates.

A5.6 We are therefore asking respondents to this consultation to provide any information that they have, that they think will be relevant to us in assessing the potential impact on their business, or their sector as a whole. We will take all of this information into account before we propose any specific fees, and we will publish our assessment of the impact on users along with those proposals.

Impact assessments form part of best-practice policy making

A5.7 Impact assessments provide a valuable way of assessing different options for regulation and showing why the preferred option was chosen. They form part of best practice policy-making. This is reflected in section 7 of the Act, which means that generally we have to carry out impact assessments where our proposals would be likely to have a significant effect on businesses or the general public, or when there is a major change in Ofcom’s activities. However, as a matter of policy Ofcom is committed to carrying out and publishing impact assessments in relation to the great majority of our policy decisions. For further information about our approach to impact assessments, see the guidelines, “Better policy-making:

38 See Independent audit of spectrum holdings - Government response and action plan March 2006 at http://www.spectrumaudit.org.uk/pdf/Governmentresponse.pdf, paragraph 6.3


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Ofcom’s approach to impact assessment”, which are on our website: http://www.ofcom.org.uk/consult/policy_making/guidelines.pdf

We are not publishing a full Impact Assessment for this consultation, as we are seeking evidence and views from stakeholders to inform our fee proposals first

A5.8 We are publishing this initial consultation without a full Impact Assessment, for two main reasons:

• We have not yet decided on the fee structures we plan to implement; and

• Both the aeronautical and maritime sectors are complex, and we wish to gather evidence and analysis from as many stakeholders as we can in order to understand these sectors fully.

We have not yet decided on the fee structures we plan to implement

A5.9 We are launching this consultation in order to elicit responses from stakeholders that we hope will help us judge how best to develop our current indicative fee assessments, and proposed general framework, into more specific proposals to set fees in the various bands.

A5.10 We have invited comments on a number of major aspects of our proposed framework, for example not pricing aircraft licences (and, following on from that, not charging any user in respect of certain airborne-only uses). If the responses from stakeholders to this consultation, and our consideration of those, led us to conclude, for example, that aircraft licences should be priced, that would fundamentally affect the overall fee structure for licences in the relevant bands, and in consequence the impact of fees throughout the aeronautical sector. While we currently do not see spectrum efficiency benefits from pricing aircraft licences, we are open to respondents’ comments to this consultation, and we are not ruling out that one or more stakeholders may propose an entirely different approach.

A5.11 Similar considerations apply in respect of other aspects of our outline proposals, which will therefore have bearing on the impacts of specific fee proposals in different bands in both sectors.

A5.12 For example although it is our current view that the basic Business Radio fee structure and rates may be appropriate for VHF communications licences, we understand that the particular use made of these channels by the aeronautical and maritime sectors, and how congestion arises and is distributed across the UK, are different. Such differences may imply that the detailed structure of charges in each sector should be amended to reflect them.

A5.13 In the case of radar bands, we are at an even earlier stage in thinking about licence fee levels and structures. In the first instance, the apportionment of opportunity costs to reflect shared use in many bands between civil and military users is not yet settled, and is an important area that requires further work, in conjunction with the stakeholders concerned. Beyond that, we will need to establish how much of the “civil” allocation is currently used by different existing licensees, and how much of the relevant spectrum is free for potential use, either by radars or other transmission types.


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A5.14 In particular, radars use spectrum in a way that is very different from all the other uses that we currently price through licence fees, and we will need to consider how the characteristics of this specialised use can be analysed to assess the impact of individual licensees on other potential users. Such analysis is important in order to work out how much each radar use excludes other uses of the spectrum, in order to arrive at an objective approach to reflecting relative opportunity costs in a pricing algorithm.

Both the aeronautical and maritime sectors are complex in business terms

A5.15 Both sectors encompass very small through to very large users, with very different business models. This means their positions in relation to their markets – both suppliers and customers – vary throughout the sector. This feature is very important as it determines, to a large extent, whether particular types of user can, or will choose to, pass on costs, absorb them, or take direct action to reduce their spectrum use. For example, UK international airports which serve as “hubs” or gateways into and out of Europe may be sharply affected by increases or decreases in global trade and economic cycles; and they may also be competing with (or complementary to) large airports in continental Europe. For airports focused on servicing other types of aviation user, such as domestic flights, the airports concerned may see their competition as more likely to come from other transport modes; while in providing services to flights to typical foreign holiday destinations, they are competing with the UK tourism and leisure industry. Aviation users in each of these different markets may respond differently to potential cost and price changes.

A5.16 We are therefore using this initial consultation to ask not only for respondent’s views on our broad proposals, but to ask for information directly from users about their specific circumstances in order to inform our Impact Assessments.

What will we be trying to assess?

A5.17 In considering these aspects of the UK civil aeronautical and maritime markets, Ofcom is not directly seeking to avoid or prevent any particular outcome for individual transport businesses. The DfT, the CAA and the MCA are among the UK public bodies variously responsible for the effects of regulatory policies in transport markets that may impact the economy, the environment and society.

A5.18 Instead, our own responsibility is as set out in the Act: to further the interests of citizens in relation to communications matters, and to further the interests of consumers in relevant markets, where appropriate by promoting competition; and specifically, in our spectrum management duties, to secure the optimal use for wireless telegraphy of the electro-magnetic spectrum. Our general expectation is that introducing market mechanisms to how spectrum is allocated and used is likely to increase the chance that the spectrum is put to optimal use across the different sectors that variously require scarce spectrum.

A5.19 As the UK spectrum authority, we therefore need to understand, as part of our Impact Assessments, both:

• The potential benefits that might be secured from spectrum use, as a result of our proposals, over the medium and longer term; and

• Any short-term or longer-term costs in terms of impacts on the existing utilisation of the spectrum.


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We want to ensure that the expected benefits to society outweigh the costs

A5.20 In general, in exercising our spectrum management duties, we take the view that enabling users and potential users to decide their need for spectrum, and how they want to use it, in light of market signals, is more likely to result in optimal use, and hence optimal benefits for citizens and consumers, than a framework in which the spectrum regulator decides who can access the spectrum, and what they can use it for. Spectrum pricing, along with the use of auctions, making licences tradable and liberalising licence conditions, are all aimed at enabling market-led rather than regulator-led decisions by spectrum users.

A5.21 Over time, we expect the combined effect of these policies to be that spectrum will be accessed, and used, by those users who can secure the most benefits, either public or commercial, from each allocation.

A1.2 Whether or not a licence is subject to AIP, the opportunity cost borne by society is the same: that of the highest-value alternative use excluded by the existing user. This cost, broadly, signals the potential benefits to citizens and consumers that might be secured, over time, by optimising spectrum use, and hence signalling these opportunity costs via prices can assist the market in moving towards the highest-value use of the spectrum.

A5.22 However, the nature of much spectrum use is such that users and potential users may need some time to respond to such market signals. Investment in technology to use spectrum for new purposes, or more efficiently, may take years to develop and test. It may take even longer for the business case, whether purely commercial or in terms of public benefits, for a new application to be proven sufficiently for funding to be available for spectrum to be acquired for that use. Allowing markets – that is, users and potential users – to drive spectrum use changes, rather than the regulator, removes some of the institutional delay, and regulatory risk, that were inherent in the regulator-led system. However it remains the case that the benefits of auctions, pricing, trading and liberalisation are only sometimes available to specific users in the short term, and that the benefits of pricing signals can sometimes be felt more over the medium to longer term.

A5.23 Introducing spectrum pricing for a spectrum band or bands is therefore expected to have medium and long-term benefits; but it may have short-term or even medium-term costs to existing users in transition, and we need to assess these, and estimate for how long such costs might persist, to enable us to compare expected shorter term costs with potential longer term benefits, and accordingly to decide the right fee approach in specific circumstances.

A5.24 By “costs” in this case we do not mean simply the financial cost of any fee increases for a licensee, but the overall cost to society in terms of benefits secured from the spectrum that may be put at risk by overly abrupt or burdensome changes.

A5.25 However, the financial cost of any fees is relevant to considering whether the overall costs associated with the proposal are outweighed by the benefit. That is because different sectors, and users within any sector, may have greater or less flexibility to respond to a change in their spectrum costs. In particular, they may have less flexibility in the short term than they do over the medium or longer term. This difference applies not only to responses which involve changing spectrum use, but to changing expenditure on other inputs, and to passing on costs to customers, or adjusting outputs.


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A5.26 If fees are too high, or if they are introduced too rapidly taking into account the time needed for users and their customers to adjust to new price levels, this can lead to costs for society. If fees cause shock effects, some users who would have remained viable in the medium term may not be able to weather the short-term effects and respond efficiently in the medium to long term.

A5.27 In many cases, these users could be expected to be replaced by new users, either offering the same service or a new service using the spectrum at lower overall costs. However, this possibility does not eliminate the costs of shock effects.

A5.28 In the case of replacement by the same type of user, there are economic costs from disruption – the costs of one user ceasing to operate and the costs of the new user starting, neither of which generate benefits to consumers. Setting fees which directly resulted in such avoidable disruption would therefore impose avoidable costs.

A5.29 In addition, given current constraints on new uses in these bands (some of which may be lifted but only gradually over a protracted time), new uses may take some time to appear, and in the meantime, the spectrum would be less efficiently used in providing services to consumers.

We want to understand the economic circumstances of each sector, and the different circumstances of different users in those sectors

A5.30 We are asking respondents to provide any information they consider will help us understand their sector and its ability to adapt to input cost changes, or the particular position of a type of user, or any individual user.

A5.31 The circumstances of the sectors, and those of individual users in each sector and their customers, determine their “elasticity” in responding to cost changes – how much they can, and would be expected to, change their decisions in response to such changes. Important aspects of those circumstances would include:

• Their overall cost profile, and how diverse their cost base is;

• Their ability, or constraints on their ability, to change how much they spend on other inputs when the costs of some (like spectrum) change significantly;

• Their ability, or constraints on their ability, to directly change how much spectrum they use;

• Who they are competing with – their “relevant market” – the extent to which only some competitors will be bearing new costs disproportionately.

The cost profile of users in both sectors

A5.32 Generally speaking, an organisation with a highly diversified range of input costs may have more choices about making small reductions in one or more other costs in response to increases in others (such as spectrum).

A5.33 However, some of those costs may be difficult to reduce to any degree without reducing the volume of operations; and some may be prone to major input price changes independently of any decisions by the operator. The most obvious cost for both sectors which shows some of these aspects is fuel, but there may be others such as aviation infrastructure charges.


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A5.34 In addition, many of the other costs for aeronautical and maritime operators are incurred under, or as a result of, specific sectoral regulation – such as safety and security requirements. This is likely to constrain their choices when managing a change to spectrum prices.

A5.35 We are asking respondents to provide any evidence they think is relevant to considering what flexibility users may have in adjusting other inputs in response to changes in the costs of spectrum.

How much users can influence their spectrum use

A5.36 In less regulated sectors, users may have relatively free choices over their spectrum use: they might use different technology that uses different frequencies, or they could in some cases use communications technologies that rely less on spectrum.

A5.37 Because most transport uses necessarily involve at least one mobile user (in this case, the ship or aircraft), spectrum is likely to be necessary for almost all the current purposes to which it is put.

A5.38 Further to this, there are constraints, of varying severity, that would make changing frequencies or even channel size less easy than in a less-regulated sector.

A5.39 However, there may still be flexibility, within such constraints, for users to adapt their use in ways that allow other users access to spectrum – either relieving congestion in the current use, so more users can be accommodated, or enabling new users to access unused or “white space” spectrum. Examples of this would be changing or updating radar installations to reduce either emissions or sensitivity, or choices taken (in consultation with other users and/or the MCA and the CAA) as to whether to use ILS or MLS in the longer term, or to use narrower channels for VHF communications, where this is practicable.

A5.40 Any such decisions would have costs in terms of new equipment and training, as well as taking time to implement. However, they form part of the set of business decisions which must be made in the sectors over time in any event, where a better knowledge of relative spectrum costs is likely to enhance efficient decision-making.

A5.41 We would welcome any analysis and evidence from respondents about how much flexibility they perceive there is for them, or their sector, to make such changes, and where there is such flexibility, of likely costs and timescales.

The markets users are competing in, and the potential effect on consumers

A5.42 The extent, and the source, of competition faced by particular users influences whether or not they could pass on any cost increases, not only for spectrum but for any other input.

A5.43 To take some illustrations:

o If any spectrum user is offering services in competition only with other providers who are facing the same types of cost changes, then passing on such changes may be feasible and sensible.


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o However, if such a user is competing not only with other UK providers of its service, but with other airports or ports, for example, then a marginal increase in costs may be sufficient to affect demand for its services, which in turn will constrain the ability to pass on cost changes to customers.

A5.44 Understanding and predicting all the likely effects on customer behaviour is not easy. We would not expect stakeholders to be able to provide us with clear assessments of such effects at this stage, particularly since we have not provided firm fee levels for them to consider.

A5.45 However, an understanding of the different elasticities of these different customer bases may help us to assess whether and how cost changes might be passed on to customers. That is, although we can estimate average cost impacts per passenger movement, or per tonne of freight, in the UK from potential licence fee levels using existing demand data, these are not predictive of actual impacts, which will depend on users’ pricing responses and their customers’ consequent demand responses.

A5.46 We are particularly interested at this stage in stakeholders’ views on the potential impact of VHF radiocommunications licence fees in this respect, as we are proposing to introduce these fees in 2009. Absent such information on demand responses, we could make a series of illustrative assumptions using existing demand levels (i.e. assuming no such demand responses). These would give us an implied average cost increase per passenger movement, or per tonne of freight, using the following type of analysis:

Figure A1: provisional indication of total impact of fees indicated in this document for aeronautical VHF radiocommunications licences

Guideline fee, per annum

Number of licences

Total fees implied £

Aeronautical Simplex 8.33kHz channel

1650 38 62,700

Simplex 25kHz channel

4950 1823 9,023,850 Number of passenger movements per year39

Implied cost impact per passenger movement

TOTAL 9,086,550 235,000,000 3.9p

39 2007. Source: Department for Transport, http://www.dft.gov.uk/pgr/statistics/datatablespublications/tsgb/2007edition/


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Figure A2: provisional indication of total impact of fees indicated in this document for maritime VHF radiocommunications licences

Total fees40 Tonnes moved by ship each year41

Implied cost impact per tonne

£860,000 584,000,000 0.15p

A5.47 However, such guideline estimates require a number of strong assumptions, the realism of which we have not yet been able to test: they are unlikely to represent the true picture. For example, the above illustration assumes that the full cost impact of fees would be passed on in service prices to the spectrum users’ customers, which may not be the case. It is also, necessarily, an estimate of the average impact and not the impact of specific fees on specific customer types. The actual impact may vary between individual airports and ports, and between different types of customer – for example, many aviation infrastructure charges are weight-based in part to reflect the relative willingness to pay of the customers concerned.

A5.48 We would be grateful if any stakeholder wished to provide information about the relevant markets likely to be affected by the types of licence fees outlined in this document:

o the prices charged to specific customers of relevant spectrum users, or standard prices in the sector in the UK;

o comparable prices charged by competitors to the affected spectrum users, if known;

o and any estimates of the proportion of spectrum users’ customers who may change their decisions about which services to use in response to spectrum users’ price increases;

o in light of all of this, any stakeholder’s assessment of whether commercial considerations would point to costs being passed on differentially between customers based on relative ability to bear cost increases.

Information we are seeking

A5.49 In summary, we would welcome any information that stakeholders consider is relevant, particularly as it relates to our proposed Impact Analyses for VHF licence fees later this year, but particularly including:

o Information about spectrum users’ cost bases, whether any elements are volatile, and whether any elements are heavily influenced or constrained by regulatory requirements;

40 See Annex 8 for workings 41 2006. Source, Department for Transport, as above.


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o Their understanding of what costs, and timescales, would be involved in making any possible changes to their spectrum use in response to increased licence fees;

o Spectrum users’ own prices, and the markets in which they are competing for consumers.

A5.50 In order to get a better understanding of the potential net economic benefits of licence fee proposals to encourage the use of different frequencies over time, we would also like to hear from any stakeholder who considers that one or more of the bands could in future be useful for a service he provides, or would like to provide.


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Annex 6

6 Ofcom response to specific issues previously raised by stakeholders We previously published an independent report on the potential benefits of, and a possible approach to, applying administered incentive pricing to this spectrum

A6.1 Following the March 2006 confirmation by the Government that it agreed Ofcom should consider applying pricing to certain aeronautical and maritime uses, we commissioned and published a report by Indepen and Aegis in April 200742.

A6.2 This report was intended to inform both Ofcom and stakeholders, and did not represent Ofcom policy or proposals. However we published it in the interest of informing licensees and the wider public, and made clear that we would be interested to know reactions.

We are reproducing the points raised by stakeholders here in order to ensure that our thinking is fully explained

A6.3 We received a number of representations on the principle and detailed recommendations in this report. Some of the themes of the representations have been covered in the course of this document already. However we hope it is helpful to set out all of the themes here, and to present our analysis and current conclusions on them, to ensure we have explained our thinking and so that respondents to this consultation can judge whether, and how, we have taken these points into account.

Some respondents felt that AIP was not the right way to promote more efficient use of spectrum by these sectors, and some suggested alternative means of increasing spectrum efficiency

A6.4 While various respondents agreed that there is considerable potential for more intensive use of certain bands, some explicitly did not agree that the study made the case that AIP would provide the necessary incentives to achieve this outcome.

A6.5 Some respondents considered that a collaborative approach between the sectors and their regulators, and including Ofcom, should be relied on instead. One respondent proposed a detailed protocol for continued co-ordination and collaboration to achieve identified efficiencies, and to work up proposal for changes to international agreements and regulations where needed.

Our response

A6.6 In all uses of spectrum, there are broadly two options for achieving changes of use that increase the efficiency with which the spectrum is used:

• either users themselves change their use (or transfer their spectrum to someone who makes better use of it in response to incentives that they face); or

42 See footnote 3 above


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• the spectrum regulator or manager (Ofcom or the CAA) compels changes in use through command and control regulation.

A6.7 In the case of aeronautical and maritime spectrum, the first option is made more complicated because there are UK sectoral regulators with important roles in co-ordinating any change of use, and international regulations.

A6.8 We recognise the ongoing crucial roles of the MCA/DfT and the CAA in facilitating discussions with their sectors, and co-ordinating and implementation of new technologies. We envisage that this role will continue – AIP is certainly not a substitute for users and their regulators continuing to liaise and co-ordinate, and is instead a way to improve the incentives within which these stakeholders undertake such activities.

A6.9 Moreover, without any pricing signal, the incentives on either users or their regulators to make changes will be attenuated and possibly even distorted. This could happen because while the equipment, training and other costs associated with a change of technology would be taken into account, the effect on spectrum costs would not be. In the extreme case, this could lead to a change of use that actually increased the spectrum opportunity cost – for example by using spectrum that could be more productively used by another service. If such an increase in the spectrum cost to society was not offset by the accompanying increase in other business benefits, or safety benefits, as assessed by the user or sectoral regulator concerned, this change would decrease the overall efficiency of spectrum use.

A6.10 We consider that the collaborative approach to identifying, planning and implementing changes is clearly right in these highly-regulated sectors; but in our view, a signal about the cost of spectrum will improve the information available to users and regulators in discussing those changes.

Objections to suggestions that band-sharing might be one response to pricing

A6.11 Several respondents raised objections to the suggestion that band-sharing might be a practicable response to pricing.

A6.12 Specifically, one respondent considered that it would be more effective to pursue a long-term strategy for managing radar use than the suggestion in the report that one response to pricing this band might be to allow sharing by non-radar users. This respondent felt that such a response might be a short-term approach.

A6.13 One respondent considered that it was inappropriate for the report to suggest band-sharing when one of the justifications for pricing in certain bands was that the band was already congested.

A6.14 One respondent felt that Ofcom’s interest in promoting band-sharing was driven by the potential to increase revenue.

Our response

A6.15 In relation to band-sharing in the radar bands, whether to withdraw any reservation on a radar band that prevents sharing, to maintain that reservation pending the outcome of a longer-term review of radar use in the band, or to allow sharing on a temporary basis while the longer-term review is carried out, would be decisions for the DfT, the CAA, the MCA and (where appropriate) MOD. All of these options will have costs and benefits associated with them, for users and their regulators. It is


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not the aim of AIP to encourage any specific choice over the others, but simply to ensure that in making that choice, the regulators and policy makers take spectrum costs into account alongside other costs and benefits.

A6.16 More generally, decisions on the appropriate response to the pricing signal provided by AIP will be for users, and their regulators where appropriate, to decide. If a band is congested across the UK, it seems unlikely that users or their regulator would consider band-sharing to reduce their costs would be appropriate. However, some bands are congested at certain locations – busy airports or ports, for example – but not heavily used by the sector elsewhere. In those cases, it would be open to DfT to consider withdrawing any exclusion of other uses at the “empty” locations and where it did so, we would expect that any payments by DfT for unused spectrum should be reduced. In making any such decision, DfT would weigh the benefit of saving spectrum costs against the implied lost benefit from of no longer reserving the spectrum against future need by aeronautical or maritime users, and any potential costs arising from interference from the new users affecting aeronautical or maritime users. In assessing this, DfT, the CAA and the MCA would, as with all other such decisions, hold the maintenance of adequate safety paramount. Similar options are being reviewed by the MOD in response to the incentives framework agreed for the spectrum which it controls.

A6.17 On Ofcom’s objectives in relation to band-sharing: as set out above, we are not attempting to encourage any particular response from users or their regulators in proposing AIP. Whether band-sharing is the optimal response will not be for Ofcom to decide. Where DfT/CAA/MCA consider that band-sharing would be best in terms of their objectives, and indicate that they would be content for new users to be authorised to use a given band at given locations, we would expect that any payments from DfT would reduce in recognition of this so there is no automatic assumption that an increase in users would mean an increase in the combined payments made by DfT, licensed aeronautical or maritime users, and new licensed or licence-exempt (and hence fee-free) users.

A6.18 Moreover, Ofcom is governed by the terms of its statute, and can only act in furtherance of its objectives. We have no objective relating to the total amounts of payments made by licensees or the Crown in respect of the spectrum. We are expressly limited, in setting fees and all of our other spectrum management decisions, to taking decisions that we consider will promote the optimal use of the spectrum, in the interests of citizens and consumers. In some cases that means making uses licence-exempt, or issuing licences free of charge such as ship radio licences.

Some respondents were concerned that AIP would not provide a mechanism to reward the release of spectrum or the use of more efficient, newer technology

A6.19 Some respondents did not consider that AIP would provide for any reward for users (or regulators) releasing spectrum, or switching to more efficient technology.

Our response

A6.20 Under the current administrative fees tariff for aeronautical and maritime use, there is no reward for a user who reduces his need for spectrum, because his spectrum costs will not change. In contrast, pricing spectrum in a way that relates to its value has an intrinsic reward, or incentive to make more efficient use, because reducing spectrum needs will lead to a reduction in the fee.


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A6.21 In any particular instance, it may be the case that the cost of changing to newer technology would outweigh the savings from reducing the need for spectrum. In such a case, it would be rational for users (and in this case, the CAA or the MCA) to conclude that the current use should continue. In our view, AIP is helpful in providing one key piece of information needed to come to this decision, but it is not the only consideration that users or their regulators would wish to take into account.

The effect of international constraints on the use of the spectrum

A6.22 Several respondents referred to the fact that much of aeronautical and maritime spectrum use is governed by international agreements, of various types. Their comments raised two specific points:

• That international agreement is needed to change the frequencies used, and/or to change technologies;

• That the Cave Review specifically commented that “for some spectrum uses, though, the opportunity cost will be zero. This will occur where use of a particular band in the UK has been exclusively defined through international agreements and incumbents have no scope to change their spectrum use43”.

Our response

A6.23 We recognise that changes to spectrum use may sometimes take a long time to achieve. This is the case for many if not most uses, and for various reasons. In many cases, the time taken to achieve changes is lengthened by purely market factors, such as manufacturing lead times and the time it would take for all the users in a sector to co-ordinate a change amongst themselves, where that is needed to make the change practicable.

A6.24 In other cases, there is an additional hurdle to changing spectrum use, in that international agreement is needed in order for operators to be able to implement the change. International agreement to changes proposed by one country is, of course, not guaranteed.

A6.25 However, we are concerned, in applying AIP, to provide incentives for spectrum users – and their regulators where appropriate – to take efficient decisions about spectrum requirements over the medium to long term. Many transport investment expenditure decisions must be taken over such timeframes given the nature of the assets and markets involved. If neither users nor regulators faced a price signal in relation to internationally-agreed spectrum, their medium to long term incentives to consider whether this spectrum was the most appropriate for requirements would be considerably reduced. Faced with a choice of continuing to use this free spectrum, or to propose a change of use to a priced band that was usable for their purposes but less suitable for other valuable uses (so would have a lower opportunity cost), their incentives would be more towards staying in the free band than would be the case if they took the relative opportunity costs of both bands into account on the same basis. Similarly, they would have reduced incentives to propose a reduction in the amount of spectrum used in this band – because the costs of changing technology would not be weighed against the potential savings in spectrum costs.

43 Review of Radio Spectrum Management, March 2002, paragraph 66.


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A6.26 In addition, if there were no pricing signal relating to the opportunity cost of spectrum, there would still be clear signals, in the form of market prices, attaching to other inputs needed including those needed to comply with operating regulations. Rationally, both users and their sectoral regulators would tend to prioritise changes to regulations or international agreement that would realise real savings for their businesses. This could have the result that regulations could be changed that actually reduced overall economic efficiency. That is, they might opt for changes that produced savings on one or more priced inputs but had a greater cost to society overall because the opportunity cost of spectrum – the services excluded by the aeronautical or maritime use – would have been worth more than the saving. This is a risk that will persist for as long as there is no reason to consider the opportunity cost of spectrum within any investment, or regulatory, decision.

A6.27 The use of AIP is, in our view, justified by the benefits that should materialise in the longer term, as better decisions are made in light of increased awareness and appreciation of the value of spectrum.

A6.28 The Cave Audit of Public Sector Spectrum Holdings, which included consideration of these bands, limited its recommendations for pricing to the following maritime applications; radar, coastal station VHF radiocommunications, and DGPS. In the aeronautical sector the audit recommended application of AIP to radar, and noted that there may be a case for pricing DME ground stations and VHF radiocommunications. We are proposing to price a larger number of bands, based on the observations made in the main consultation document, namely:

• that any use, or reservation for use, of spectrum has an opportunity cost as defined above;

• in the case of bands that were not previously recommended on grounds of international constraints, that international agreements are subject to change, albeit over the long term, and that in order to increase the likelihood that UK policy authorities will assess the potential for change in light of all relevant costs, the opportunity cost of spectrum should be clearly signalled, in the form of licence fees for users or payments made, or other incentives applied to, the UK policy authority in respect of the opportunity cost.

Some respondents voiced concerns that AIP would discourage people from installing and using radio equipment for safety-critical purposes

A6.29 All of the respondents who raised this concern came from the maritime sector, so this sub-section addresses specific maritime concerns.

A6.30 Respondents made a number of specific comments about the potential for AIP to influence decisions to install or use safety equipment:

• That even assuming no pricing on ship radio licences, pricing on coastal station licences might be passed on to individual users. If individual users had to face costs relating to using spectrum they might elect not to own VHF or radar because of the cost. This would reduce safety at sea;

• That AIP would disincentivise non-regulated vessels (eg leisure craft) from the carriage of radio equipment;


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• That charges might be passed on via a levy on equipment sold and used, which would discourage use and reduce safety;

• That Indepen’s conclusion that AIP will not be a disincentive to the carriage (and use) of radio and radar systems was unproven.

Our response

A6.31 Since we are not proposing to introduce any charges for individual ship operators directly related to their use of radio equipment, we do not consider that our AIP proposals would create disincentives on such operators to use such equipment.

A6.32 In the first instance, ship operators will continue to be able to install and use radio equipment relying on the authorisation in their ship radio licences, which will continue to be free of charge (if issued online) or for which only a one-off, administrative charge will apply. There will be no radio licence fee impact on any user from a decision to use, or not to use, radio equipment – no cost from using it, and no saving from ceasing to use it, or decommissioning from a vessel. So there should be no direct disincentive to ships’ radio use arising from AIP.

A6.33 As some respondents noted, AIP based licence fees charged to ground (coastal) stations may end up being passed on to ships, as part of their berthing or other service charges. However, this does not automatically imply a disincentive to ships using radio equipment for safety purposes. For example, if the costs of AIP fees were passed on within a single service charge, there would be no saving to ships resulting from ceasing to use their radio equipment as the service charge would not be affected.

A6.34 Decisions on whether and how to pass on costs will be for individual port authorities to decide, in light of their assessment of users’ likely response. We would expect port authorities to take such decisions based not only on the spectrum cost of various uses, but on their wider circumstances and those of their customers. Port authorities have a crucial and direct interest in safe operations and would therefore be expected to take safety fully into account in such decisions.

A6.35 Nevertheless, before we propose any direct fees for coastal station licences, we will consider the potential impact on spectrum use and will conduct a full public consultation. We would welcome any evidence or relevant information that respondents to the current consultation wish to provide that would support concerns about AIP for coastal station licences influencing ship operators’ decisions whether or not to use radio equipment for safety purposes.

Some respondents argued that the Port Marine Safety Code would not be appropriate or sufficient to ensure safety standards were maintained following introduction of AIP

A6.36 Respondents made a range of comments relating to the Port Marine Safety Code (“PMSC”). Some noted that the Code itself is not mandatory, so ports can and might not follow it if they considered the spectrum costs of doing so were not justified.

A6.37 As noted by these respondents, it is always open to an individual port authority to depart from the arrangements and procedures recommended in the PMSC. However, in doing so any port authority would still be required to meet its own individual and specific legal duties to have regard to safety considerations. As a


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result, it should not be the case that any port authority would pursue an action that would compromise those safety considerations, whether that action would reduce its spectrum fees liability, or reduce another of its business costs.

A6.38 Respondents objected to the suggestion in the Indepen report that the PMSC could be made mandatory. Any decision to impose new safety regulations, such as a new statutory requirement to follow the Code, or reproducing the provisions of the Code in legislation, would be for the DfT to take in fulfilment of its transport safety objectives. We are not making any recommendations or suggestions whether the DfT should or should not consider this.

One respondent felt that safety concerns were adequately addressed by the Report

A6.39 One respondent agreed with the report’s assessment of the potential safety effects, and also noted that any disincentive arising from AIP should be dealt with by revised regulation, not by reducing AIP.

One respondent considered that Ofcom should conduct a Formal Safety Assessment

A6.40 One respondent considered that before proposing or introducing AIP, Ofcom should conduct a Formal Safety Assessment such as that required by the IMO.

Our response

A6.41 The IMO requires the use of a Formal Safety Assessment process in specified circumstances:

• By member governments when proposing amendments to maritime safety, pollution prevention and response-related IMO instruments in order to analyse the implications of such proposals; or

• By a Committee, or an instructed IMO subsidiary body, charged with providing a balanced view of a framework of regulations, so as to identify priorities and areas of concern and to analyse the benefit and implications of proposed changes.

Our response

A6.42 Our proposals to amend the basis of charging some maritime operators for their spectrum licences do not entail any changes to safety, pollution prevention or response-related instruments, nor to national regulations in these areas. As noted above, we do not currently foresee any effects on safety arising directly from the introduction of AIP; but where a full Impact Assessment indicates that such effects might arise, it would fall to the DfT/MCA to consider whether these were acceptable and to take the steps it considered necessary to mitigate or counteract them. We will seek advice from the DfT and the MCA in assessing the impact of any fees before we introduce them.


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Some respondents felt that AIP would encourage a “drift” to the use of mobile phones for distress situations

Our response

A6.43 We are not proposing to charge coastal stations, nor anyone else, for the use of the distress channels. Ship operators will continue to be able to choose whether to use the dedicated channels or other means to communicate with the coastguard or other ships.

One respondent was concerned that AIP would lead to a reduction in spectrum available for radio communications, with safety implications

A6.44 It is not the aim of AIP – in these or any other sectors – to achieve specific changes in spectrum use. Pricing spectrum is intended to ensure that decisions made by users, and if relevant, their sectoral regulators (the CAA and the MCA), are informed by the spectrum costs associated with them, just as the equipment, training or other costs.

A6.45 In future, as now, any such decisions would take into account not only costs but the benefits of the spectrum use. For an airport or coastal station, these benefits are largely in terms of safe operations. Any decision by an airport or coastal station to reduce the number of channels it uses would therefore be taken only if that airport or coastal station considered that commercial operations would not be constrained, and that the necessary capacity for safe operations would be retained; and that this maintenance of safety capacity would meet all appropriate regulatory requirements.

A6.46 In the case of aeronautical and maritime spectrum uses, the DfT, the MCA and the CAA are also key decision-makers, not only in relation to unused spectrum currently reserved in case of need for future uses by the sector, but in relation to spectrum reservations for these sectors that are agreed at international level. All three of these bodies have safety of operations as a paramount concern and so any decisions they might make about releasing or sharing spectrum would only be taken if they were satisfied that there would be no unacceptable effects on safety.

One respondent wanted assurance that search and rescue channels, and those used for broadcasting safety information, and 121.5 MHz, would be protected from interference from band-sharing

A6.47 One respondent was concerned that any proposals to allow band-sharing in maritime spectrum should specifically exclude channels either internationally allocated, or used in the UK, for emergencies and to broadcast safety information.

Our response

A6.48 We are not making any specific proposals about sharing in any aeronautical or maritime bands in this document. In future, if either DfT or the CAA wishes to release or share spectrum within the aeronautical or maritime allocations, they will consider any potential risks arising from interference to the current uses as well as any saving to them in spectrum costs. The CAA and DfT both have primary objectives relating to the safety of air and maritime transport so would take full consideration of the potential for interference from sharers in any channel, including those used for search and rescue, and for broadcasting safety information.


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Some respondents argued that it would be impossible, or unacceptable, to expect that ships could reduce or cease radar emissions, or directionally attenuate them, while in port

A6.49 Some respondents objected to the suggestion in the Indepen report that ships might reduce their impact onshore by not using their radars, or reducing their radar use, when in port.

Our response

A6.50 Ships’ use of radar may impact on possible alternative land-based use of radar bands. Ofcom recognises that it may be impracticable and even potentially dangerous in some instances to require ships to switch off their radar while in the vicinity of a port. Some useful reduction in emissions may however be possible if berthed ships chose to switch off their radar.

A6.51 Ofcom has no view as to the feasibility of using legislation or other controls to reduce or cease radar emissions from ships while in port. This would be a matter for DfT (and the MCA) to consider. Any decisions about spectrum use in response to spectrum pricing signals will be for users, and their safety regulators, to take. The MCA will continue to have safety as its paramount objective and will therefore wish to ensure that changes proposed to any aspect of marine operations will continue to meet its own, and international, safety requirements.

A6.52 We are proposing to seek information and advice from users, the DfT and MCA to gain a full understanding of patterns and characteristics of use, and any other relevant factors, in drawing up proposals to set licence fees. The particular characteristics of use of the maritime radar bands are clearly a relevant consideration in determining how to apportion the opportunity cost of use to any licensee.

One respondent felt that AIP should take into account the potential future needs for spectrum

A6.53 One respondent was concerned to ensure that our AIP proposals would take into account the potential future needs for spectrum, and ensure there is sufficient capacity to allow development of alternative radio/satellite systems.

Our response

A6.54 It will be for licensees, not Ofcom, to decide whether or not to keep licensed spectrum in reserve for new developments or to rely on the market to meet new requirements. In the case of spectrum not currently used but reserved for aeronautical or maritime use, any decision to continue to reserve this will be taken by the MCA and/or the DfT in light of spectrum costs, and their assessment of the benefits they consider are secured by keeping it.

A6.55 The Government’s response to the Cave Audit, published in March 2006, it stated that If requirements cannot reasonably be satisfied through existing national allocations or through the market, and there is a demonstrated safety or security critical need, or mandatory international obligation, a non-market assignment will be considered through the UK Spectrum Strategy Consultative Committee (“UKSSC”)44. If it is agreed by the UKSSC that such an exception is justified,

44 UKSSC is an interdepartmental Cabinet Official committee


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consideration will be given to formally directing Ofcom, under the appropriate provisions of the Communications Act 2003, to make the spectrum available through administrative assignment45.

Ofcom’s Impact Assessment should include assessment of all social, economic, environmental and other effects, including non-financial benefits and costs

A6.56 Several respondents considered that Ofcom should, before introducing any fees, consider all the potential outcomes that might result in terms of social, economic, environmental and other effects. In particular, they felt that Ofcom should conduct a full assessment of the potential effects throughout the economy of any decisions by shipping operators to use ports in another country as a result of spectrum pricing.

A6.57 Two respondents did not accept the arguments in the Indepen report against taking indirect effects into account when setting prices.

Our response

A6.58 We will carry out an assessment of the impact of the fees we propose, and consult on this, before making any fees regulations.

A6.59 Ofcom’s impact assessments are concerned with the financial impact on licensees and their ability to absorb or pass on these costs. Ofcom’s duty in setting prices is to secure the optimal use of the spectrum so we would certainly consider whether a given fee level would result in the inefficient allocation of spectrum – for example, if coastal or airport operators would be unable to afford to use spectrum assignments that would then lie unused. In assessing this, we will consider the ability of such operators to absorb costs that cannot be passed on, for example by making savings on other inputs. We would also look, in this instance, at the potential effect on end-consumers such as air passengers.

A6.60 However, as a general rule we do not consider the “second-round” effects of decisions by licensees and/or their customers. These will depend on decisions made by individual operators, whose circumstances are all different. Their decisions are driven by a wide range of economic and commercial factors including other costs (such as fuel costs), often much more significant than spectrum costs. It is not normally possible to identify any particular decision – other than over the use of spectrum – that is solely attributable to a change in spectrum costs, because in almost every case, this was not the only available option.

A6.61 The final effect of combined business and consumer decisions on the economy, society and the environment is a matter for the relevant public authority, which may choose to intervene by paying for spectrum or subsidising some or all users, or by other measures addressed directly at a particular effect. In this instance, the DfT has responsibility for the aeronautical and maritime sectors and will consider the position of these sectors as part of its core policy activity.

45 Independent Audit of Spectrum Holdings: Government Response and Action Plan, March 2006. http://www.spectrumaudit.org.uk/pdf/governmentresponse.pdf


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One respondent felt that monetary values could not be apportioned to certain uses

A6.62 One respondent considered that radar used for maritime safety applications has no monetary value, unless the cost of life, property and the environment is calculated.

Our response

A6.63 The value of the use of radar for maritime safety is a matter for users, and the MCA, to assess. Like any public policy regulator, the MCA assesses the value in terms of its objectives – with safety being paramount – for any requirement imposed on the sector. Users similarly assess the value to them of the benefits associated with any decision to spend money, such as on upgrading or maintaining safety equipment. In evaluating transport policy options, the DfT sets out guidance which includes the basis and circumstances under which monetised values are attached to safety outcomes.

Some respondents pointed out that some users are not-for-profit organisations

A6.64 One respondent pointed out that some ports are operated on a not-for-profit basis. Other respondents mentioned other users of this spectrum who do not operate for profit.

Our response

A6.65 In general, not-for-profit organisations face the same prices for inputs such as land or energy as anyone else. Not-for-profit port authorities are under similar incentives to commercial operations in that they want to provide cost-efficient services at prices their customers will pay. AIP would be expected to have the same incentive effects on them as on commercial operations.

A6.66 We are however seeking views on whether any discounts should apply to fees charged to charities which have as their object the safety of human life in an emergency, or to other specific classes of user.

One respondent suggested that a levy on equipment would be preferable to AIP on licences

A6.67 One respondent argued that pricing should perhaps be levied on equipment manufacturers as an incentive to improve on existing technologies.

Our response

A6.68 Changing equipment technology is only one way in which users could increase the efficiency of their spectrum use. For example, neither sharing assignments with other users, nor relocating less valuable use to a less congested spectrum band, or a less congested part of the UK, necessarily have any connection with the supply or price of equipment. All could potentially allow for new uses of spectrum, increasing services to citizens and/or consumers.


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Some respondents felt unable to comment conclusively in advance of knowing our detailed fee proposals

A6.69 Some respondents noted that while they could indicate their views on the principle of charging, either overall or in relation to particular bands and uses, they needed to reserve their final position on fees for their sector until they had a clear indication of the actual financial implications.

Our response

A6.70 We agree that stakeholders’ views in response to the Indepen report should not be taken as final, pending the opportunity for them to consider the actual likely financial impact on their businesses. As discussed earlier in this document, we do not yet have the information required to propose detailed fees for licensees, although in the case of VHF radiocommunications uses, we are publishing illustrative fees from applying an adapted version of the Business Radio tariff.

A6.71 We are therefore planning to prepare and issue a further consultation document, once we have been able to consider all relevant information provided by users, in relation to the VHF radiocommunications use, which will contain a detailed tariff proposal. We will also consult at a later date, following detailed discussions with the CAA, DfT and the MCA, which will set out how we have applied their advice in arriving at detailed fee proposals. In both cases, we will then allow for respondents to assess and comment on the financial consequences of those proposals before taking any final decisions.

A6.72 At this stage, in order to improve our understanding of the possible financial impact of any proposals we bring forward, we are inviting respondents to provide any evidence and analysis they would wish to provide on the basis of the VHF licence fee rates and the per-MHz reference rates set out in this document. That information would be extremely welcome and should help to inform our detailed proposals.

A6.73 However, for the avoidance of doubt, we recognise that at this indicative stage respondents’ views may still be provisional, and all responses will be treated as without prejudice to their possible future views on our detailed fee proposals.

If spectrum pricing does not apply to all users, including ships, then the incentive effects are not clear

A6.74 One respondent commented that it was difficult to see how AIP incentives would work if a significant proportion of users in a given band would not pay it. This comment was in reference to the suggestion that coastal stations might be charged in respect of bands that were also used by ships, while ships would not be.

Our response

A6.75 We are not proposing to charge ships because we have previously decided that ship radio licences should be issued free, or for an administrative charge only. Further, we do not consider that it would create effective efficiency incentives on the ship-borne element of use of bands shared with coastal stations to introduce pricing for UK-licensed ships, while ships licensed in other countries would use the same spectrum in UK ports and coastal waters without any charge.


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A6.76 However, we consider that pricing spectrum use by coastal stations will introduce an incentive to make efficient decisions, taking spectrum costs into account. It will also provide scope, depending on decisions taken by the coastal stations themselves, for these incentives to be shared by some or all ships berthing at those stations, whether these are licensed in the UK or elsewhere. That is because ports may choose to pass on their spectrum costs in ways that incentivise their customers to place lower spectrum demands on them – which may in turn allow the port to reduce its own spectrum requirement.

One respondent felt that AIP should be specifically directed at promoting technological upgrades

A6.77 One respondent commented that it was disappointed that the goal of spectrum pricing did not seek to achieve the transition to better technologies per se, where this was possible at the national level.

Our response

A6.78 We believe that the judgment whether a specific technology change is justified in terms of overall efficiency is best taken by those who are closest to the costs and benefits of any change. In this case, this is either users themselves, or a combination of users and their sectoral regulator.

A6.79 Any technology change has costs – not only in equipment but in manpower and training – and these costs may be considerable. The benefits of a technology change are unlikely to be limited to a reduced need for spectrum, but may also involve increased business capacity, ease of operation, or increased robustness or accuracy, improving safety and reducing property risk. Ofcom is not well placed to assess all of these benefits. We have neither the sectoral commercial knowledge to assess operating benefits as robustly as users can, nor the expertise and methodology that the MCA, the CAA and DfT have for valuing safety and other public value benefits from technology changes consistently with those from other changes, such as to non-radio equipment, training or operating protocols.

A6.80 These considerations apply to all types of spectrum user. Part of our strategic aim in introducing market mechanisms to the ways in which spectrum is allocated and managed is to enable users themselves, and their sectoral regulators where relevant, to make their own judgments on spectrum use, just as they make their own judgments on whether to make non-radio related investments. Providing a price signal in respect of spectrum use should increase the likelihood that such decisions reflect the most efficient outcome overall, balancing all costs against all of the benefits that users and their regulators consider important.

Comments on specific bands or uses

A6.81 Respondents made a number of comments relating to specific bands and uses. Comments on specific bands that related to the need for international agreement to make change in any use are dealt with above, as are comments on band-sharing.

Mobile maritime use will sterilise frequencies on shore and inland

A6.82 Further to these comments, one respondent noted that mobile maritime units’ use of spectrum will necessarily sterilise spectrum onshore, and that this should be noted in assessing any pricing proposals for coastal stations.


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A6.83 We agree that the shore and inland effects of spectrum use at sea are highly relevant considerations in deciding the correct apportionment of any licence fee in these bands. Such use limits the potential for actions by coastal stations to change their spectrum use to result in either increased use by maritime users, or new uses in the spectrum concerned. This is one important factor on which we are seeking expert advice from the MCA, so that, in setting fees for coastal stations, we take proper account of the extent and impact of mobile maritime use.

Radar sensitivity

A6.84 One respondent considered that it would be inappropriate to take into account radar sensitivity to out-of-band emissions in setting prices, as suggested in the Indepen report.

Our response

A6.85 The degree to which a radar installation’s sensitivity to out-of-band emissions rules out other uses of spectrum is a factor on which we are seeking advice from the MCA and the CAA. In some cases, radar users may be able to change their technology in a way which makes neighbouring bands usable for higher-value uses, or usable at more locations. Our initial view is that in light of this, it may be appropriate to derive a licence fee tariff for radar users that recognises the relative spectrum efficiency benefits of less sensitive installations, compared with more sensitive ones. However we will consider any relevant evidence and advice from users and potential victims of radar emissions and from the MCA and the CAA before we propose a fee tariff for any radar band.

Setting fees in relation to congestion or population

A6.86 Some respondents objected in principle to the suggestion in the Indepen report that VHF comms fees might be set to vary across UK sites in line with congestion.

A6.87 Specifically, these respondents argued that the frequencies in the most congested sites, in the English Channel and along the South Coast, are congested partly because they are limited by the need to protect uses at ports outside the UK, and by the effect of interference from uses at those overseas ports.

A6.88 One respondent argued that applying any fees weighting to population would be anti-competitive and could have adverse effects on the environment if the response by users was to move goods into or out of the UK from other ports which entailed using longer inland transport routes.

Our response

A6.89 We are proposing to apply a charging scheme for maritime communications bands that is similar to the existing scheme applied to Business Radio.

A6.90 Using transport hubs, whether these are sea, air, road or rail hubs, which are close to centres of population, or close to other transport mode hubs, has attendant benefits such as lower onward transport costs to serve customers, and attendant costs, for example higher rent and rates, and higher labour costs, depending on the where the hub is. Setting prices that reflect the opportunity cost of the spectrum provides additional information about one cost that users and regulators should take into account.


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A6.91 Where there are externalities resulting from activities associated with a choice of port, say, it is for the relevant UK policy authority to address these either by direct regulation, or other means. Within this framework, it is not appropriate for Ofcom to seek to regulate these externalities by spectrum intervention, since we are not responsible for these externalities across the UK economy. Wider UK and EC transport policy is to seek to reflect external costs – including those of congestion and environmental impact – on the users which give rise to them through taxes and charges.

Timing of implementation

A6.92 One respondent considered that the timing of introducing fees should acknowledge the need for international negotiation.

Our response

A6.93 We do not propose to delay the implementation of licence fees, where these are proposed, specifically in respect of the timetables needed to conclude international negotiations. In the first instance, this is because AIP is not aimed at securing or promoting any particular change of use. If it is efficient, in terms of the benefits to users and any wider benefits desired by the CAA, DfT or the MCA, for any use to remain unchanged, then there is no need for any changes to international agreements so the timing of international negotiations is not relevant.

A6.94 Further, the judgment by users and their regulators about whether to prioritise the pursuit of an internationally-agreed change in relation to a particular use, in preference to making changes that can be implemented nationally in one band or another, or to consider band-sharing in any band, is one for them. The length of time taken to secure any international agreement, as well as the likelihood of securing support from other countries, affects such cost: benefit judgments.

A6.95 That is, if there are savings potentially available from a change of use, or from band-sharing, that outweigh the costs of making such a change, the value to users and their regulators of that change is affected by how quickly it can be implemented. Early benefits are typically worth comparatively more than benefits of the same financial value that would be available later on. Setting prices for spectrum should ensure that these costs and savings are reckoned in the same way with all other costs and savings, including how quickly benefits or savings can be expected to arise.

A6.96 However, if there is an international agreement expected in the very near future, or one has been taken but not implemented that will allow for a planned technology change, there may be justification for planning the implementation date for pricing such that we are not creating unnecessary or redundant incentives. That is, if users are in the process of planning and implementing a firmly-decided change that will release spectrum, and are incurring costs associated with that change, and that spectrum is not currently subject to AIP, it might not achieve anything in terms of long term spectrum efficiency benefits to charge for the spectrum they are vacating. Any such decision to postpone pricing would need to be reviewed if for any reason the planned change was materially delayed, or cancelled.

Consultation period

A6.97 One user urged us to allow longer than our usual ten-week period for consultation.


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Our response

A6.98 We note that for the aeronautical and maritime sectors, this document is setting out some major changes and that the financial implications may need to be considered in some detail. However, we also note that the principle of pricing aeronautical and maritime spectrum has been promoted for several years now, so although the detailed fee proposals are not known, users in the sectors, and DfT, the CAA and the MCA, have had some time to consider the nature, if not the size, of the potential impact.

A6.99 This is an initial consultation, intended to give stakeholders an understanding of our current intentions and the thinking behind them, and to give them an opportunity to provide views and evidence that they wish us to take into account before proceeding to any subsequent stages. We are planning to consult again, later this year, on our proposed fee tariffs for VHF radiocommunications, and the reference rates for bands used by radars, beacons and navigational aids. Before we introduce individual licence fees for radars, beacons and navigational aids, we will also consult on those detailed proposals.

A6.100 This will allow stakeholders an extended time to consider the impact on their businesses of all the proposals covered in this document. We consider that this approach should allow sufficient time for stakeholders to assess our proposals and to provide any information they wish us to take into account before we confirm any fees.

A6.101 Nevertheless, in light of the fact that we are making a number of different proposals for different users, and order to allow sufficient time for respondents to consider all of the proposals, and to gather and supply any evidence they would like us to take into account, we are setting a three month consultation period for this document.


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Annex 6

7 Maritime VHF channel density

A7.1 Ofcom is proposing to classify maritime VHF channels assignments using the number of channel assignments in each location as a proxy for congestion. As with Business Radio, we propose to define three categories of High, Medium and Low density. Our current view is that grid squares with more than 125 assignments (international, UK coastal and marina combined) should be considered High density, those with between 125 and 20 assignments should be considered Medium density, and those with less than 20 assignments should be considered Low density.

A7.2 The number of assignments per grid square (50km by 50km) is plotted on the map below, colour coding to indicate Ofcom’s proposed classification (Red - High density, Purple - Medium density, and Light blue – Low density). We propose to classify the Channel Islands as Low density.


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8 Worked example applying channel density and coverage framework to maritime VHF licences A8.1 This is an illustration applying the proposed charging structure, accounting for

coverage and density of assignments at each assignment location, to current maritime VHF radiocommunications licences. For the avoidance of doubt, this is not a complete or final picture.

A8.2 For the purpose of this calculation, those assignments for which either antenna height or power level is unknown, but where location is known, have been assumed to fall into the “high coverage” category. That is, this is likely to be an overestimate of the number of licences which would pay the highest fees in each category.

A8.3 However, 55 licences for which the location is unknown have not been included in this worked example.

Maritime Guideline fee Number of licences Total fees £

Internationally allocated channels:

Exclusive Shared (marina)

Exclusive Shared (marina)

High coverage High density 1480 740 109 161,320 Medium

density 300 150 634 190,200

Low density 110 75 287 31,570 Medium coverage

High density 740 370 95 70,300

Medium density

200 100 386 77,200

Low density 95 75 124 11,780 Low coverage High density 200 100 8 1,600 Medium

density 100 75 50 5,000

Low density 75 75 24 1,800 Sub-total 1717 550,770 UK allocated channels:

Guideline fee Number of licences Total fees £

High coverage High density 740 370 38 72 54,760 Medium

density 250 125 228 250 88,250

Low density 90 75 174 59 20,085 Medium coverage

High density 370 185 44 105 35,705

Medium density

170 85 258 364 74,800

Low density 80 75 66 82 11,430 Low coverage High density 100 75 5 97 7,775


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Medium density

85 75 33 135 12,930

Low density 75 75 25 33 4,350 Sub-total – UK channel licences

871 1197 310,085

TOTAL 860,855

Applying spectrum pricing to the Maritime and Aeronautical sectors · 2016-08-25 · Applying AIP...

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